Fundraising is a Means

Fundraising for a startup takes enormous effort over a sustained period. Companies that raise rounds issue press releases after closing. One might mistakenly begin to think that fundraising is an end instead of a means to an end.

Now, I do not want to discount how challenging fundraising is. It is hard, grueling, and often frustrating work. And the sense of relief and accomplishment that comes with completing a round is legitimate and real. However, I would argue that the very nature of the fundraising process, with all of its intensity and the endless defining and defending of the merits of the business and the strategies planned, can displace fundraising from its proper place in the building of a startup business.

Never forget that you are building a business. The most important work you can do is creating the building blocks of a successful business – a market-worthy product to serve a set of customers who eagerly want the value you are offering with a business model that can ultimately generate profitable growth.  

Note that fundraising is not in the top line of that description. Depending on the business, fundraising might be needed to create the core elements of the business, but, with rare exceptions, fundraising is not the business itself. Therefore, remember that fundraising is, at most, a means to an end, not the end itself.

Ask yourself: Do I really need to raise money to get this business built? 

• If you can possibly build the business without raising money, do so! You will own more of the business, have greater control, and not have the added complexity, distraction, and pressure of investors. If you are going to raise money, then the difference the investors’ money can make in the trajectory of the business you can build had better be dramatic enough to generate exciting returns for both your investors and you!
  
  
• Is there a way that you can get enough early interest from customers to fund your development and growth? Sometimes, you can get a customer to be a development partner who will pay upfront for what you are delivering. Sometimes, you can keep your product development costs low enough for your operating revenue to fund your growth (this is most often the case for consulting or service businesses, which is one reason such linear-growth businesses are often not considered ‘fundable’). It is always the case that a successful business will ultimately need to find a way to fund its ongoing operations from its own sales (this is known as first cash-flow positive and ultimately as profitability!) For some entrepreneurs with relatively low product development costs or an avenue to a significant partner willing to front some non-dilutive financing, this can be a path to having the funds to build the business without raising investor capital.
  
  
• For some businesses, there are substantial upfront product development costs that must be funded, so then the product you are building must be one that can be the foundation of a business that can generate a great return on investment. How innovative and durable is the competitive advantage and customer value you will create? This is especially true for businesses with products that have a significant development component – for instance, regulated medical devices, hardware-based products, new materials-based products, products with strong network effects that require achieving a substantial footprint via a major marketing/sales investment, etc. If that is your situation, then you must ensure that if you build “it,” there will be a spectacular growth and future profit opportunity in a big market that justifies the up-front expense. If you can, then you have a potentially fundable business that investors will be very interested in. Now, how can you derisk your story before you try to raise money? Can you build a prototype? Show that customers desperately need and will buy what you are creating? Show that your target market is large enough to justify the upfront expense and generate a significant ROI? 
  
  
• When you fundraise, you will share the potential rewards of what you are building with your investors. They will want control provisions, a substantive ownership stake in your company, and a say in some of the major strategic decisions you make along the way. Your investors are your partners, but just like other important relationships, there must be something in it for all stakeholders to ensure it makes sense for everyone. I have talked to potential founders who overvalued the invention component and the founders’ contribution and who did not want to share and did not sufficiently value the investors’ contribution to the business. If this is how you think, fundraising will be a challenging and potentially impossible slog. If you really need the money to make the business succeed, then the capital contribution of those risk-taking investors is significant – and you will need to pay for it via both your effort and sharing space on the cap table.
  

• A last thought to consider … If the primary reason you need to raise money is to pay yourself a living wage to keep doing the company, consider carefully if you and your family can afford for you to be an entrepreneur. I am not saying that fundraising entrepreneurs should not get paid. However, getting to that point is not without cost. I know this may sound harsh, but I have seen it often enough that I think the question needs to be asked and considered. Getting a business developed to the point where it will support fundraising takes time, effort, and likely at least a little founder capital investment. Then, the raising money process can take six months (in a good case!) or even years as you strive to keep building the business while looking for money. And some businesses are simply not particularly well-suited for fundraising. I wish it weren’t so, but I and others who have built successful entrepreneurial careers often have a working spouse or inherited wealth or ‘I-got-lucky-once’ or ‘I had a high-paying career where I saved a bunch’ or generous parents or some other source of self-funding in the background. If you don’t have any of those things, consider carefully how you will support yourself during the ups, downs, and hard times of entrepreneurial business-building before you jump into the deep end of that pool, not after you have drained your savings, mortgaged your house, and still have a long way to go. Some people are not well positioned to be founders – and maybe you might be better off joining an already funded startup or a bigger, more established company.

Remember that funding – and the associated fundraising work – is a means to an end. It is securing the capital you need to build a dynamic and exciting high-potential business. It is not to fund a cushy  lifestyle until perhaps after you build something so exciting and compelling that you generate a great ROI. Keep your eye on the prize, which is doing the heavy lifting of building a great business.