Raising money is a means, not an end in itself

Original author: Steve Blank
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"Not everything is gold that glitters."
William Shakespeare


For many entrepreneurs, raising money has replaced the main goal - creating a stable business. And this is a big mistake. When you take money from investors, their business model becomes yours.

Translated to Alconost .


One of my former students came to talk about his startup. When I asked: “What are you working on now?”, He first talked about how funding is moving forward. Eh ... But I should have heard about the search for a business model, about successes in selecting a product that is interesting to the market, but in 90% of cases, first I listen to the story about raising money. And it doesn’t make me happy at all.

Entrepreneurs need to think about 1) when to attract money, 2) why to attract it, 3) from whom to take money and 4) what will be the consequences.

And it all starts with understanding what a startup is.

What is a startup?


Let me remind you: a startup is a temporary organization created to search for a repeatable and scalable business model. This sentence should be carefully considered:

  • Temporary organization . The goal of a startup is not to remain a startup, but to grow to a larger scale. (If you don’t have a goal to grow, then you need not to attract money from business angels and venture investors, but to get a small commercial or state loan for business development.)
  • Search . Although you are sure that you are the author of the most brilliant innovation ever invented, it is likely that this is not so. And if you raise millions of dollars on the first day, taking up the implementation of such a project, you will spend all this money on trying to develop a bad idea.
  • Repeatability . The source of orders for a startup can be both personal relationships of board members with clients, and the heroic sole efforts of the CEO. All this is good, but the sales service will not be able to repeat this. You do not need one-time hits, but a repeatable template that can be reproduced by the sales service or visitors to your site.
  • Scalability . Your task is to get not one but many buyers, and so that each new buyer brings more income and profit. Check: if you take another sales manager or spend more money on marketing, will your income exceed your costs?
  • Business model . The business model answers the basic questions of your entire business. Who are your customers? What problems do they want to solve? Does your product or service solve the problem of consumers (product compliance with the market)? How to attract, retain and increase consumers? What are the revenue strategies and pricing tactics? Who are the partners? What resources and actions are needed to run this business? And what will the costs be?

Who to take money from?


First, decide on the type of your startup . If you are a “lifestyle entrepreneur” or you have a small business, then most likely the return on investment that you are able to provide is not interesting to business angels and venture investors. Attracting money from friends and family, commercial or government loans for small business development, etc. are more suitable for these types of startups.

If you are a growing startup, you should spend small amounts of money (seed funding) on ​​experiments to test your hypothesis. Why small amounts? No startup ever spends less money than it attracts. And at this early stage you will have to give a larger share in your firm to investors. Initial investments can be provided by friends, family, Kickstarter, business angels and, most importantly, first customers.

These sources of funds are much more tolerant of adjusting and changing the business model than late stage venture funds.

When to raise money?


The model of " lean startup » (Lean Startup) your goal - to put aside the money until such time as you will not find a repeatable and scalable business model. In times of unlimited inflow of money (Internet bubbles and risky ventures), it is easy to correct your own mistakes - by pouring in even more money. In normal times, when there is no extra money for “canceling” errors, you use the methodology of consumer development to select the product that exactly matches the market (a value proposition for the consumer segment is in the language of business modeling). And only after you succeed, you can spend money as if they never run out.

Do not confuse fundraising with building a stable business. In an ideal world, you would never need investors - you would finance your business with sales revenue. But in order to grow, a startup needs risk capital.

Attract as much money as you can - but not before you get tangible evidence that you have found the product that the market needs.

Consequences of Venture Financing


At the moment when you attracted money from a venture investor, you also agreed to accept its business model.

Here is a simple test: if you are the founder of a startup, go to the board and draw a diagram of the work of venture capital. How do foundation and partners make money? What is the internal rate of return? What is the fund's lifespan? How much do they invest in the life of your company? What share do they need to own for the liquidity event? What will they consider their success? Why?

There are two reasons to take venture money. First, you are going to expand your business as if tomorrow will never come. You invest this money to create demand among end consumers and attract them to your sales channel. The second is experience, knowledge of schemes and contacts that good investors are willing to share.

Just make sure you choose the right moment.

Lessons learned


  • Raising money is a means, not an end in itself.
  • Save your money until you find a repeatable and scalable business model.
  • Focus on matching the product to the market.
  • Conduct small experiments to test your hypothesis.
  • Raise as much money as you can after you get tangible evidence that your product is needed by the market.



About the translator

Translation of the article was done in Alconost.

Alconost localizes applications, games and sites in 60 languages. Native translators, linguistic testing, cloud platform with API, continuous localization, project managers 24/7, any format of string resources.

We also make advertising and training videos - for sites that sell, image, advertising, training, teasers, expliner, trailers for Google Play and the App Store.

Read more: https://alconost.com


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