Saturday, 29 April 2017

StartUp/David Bailey: Why Raising Money For a Startup Idea Has The Opposite Effect

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David Bailey

Entrepreneur, Early-Stage Investor, Coach
Apr 25

Why Raising Money For a Startup Idea Has The Opposite Effect

When entrepreneurs ask me how to raise money to build their product idea, my answer is always the same: you’re asking the wrong question.

I managed to raise investment off a PowerPoint presentation twice over the last 10 years. It sounds like a great idea to start off with money in the bank — but it turns out that it’s not that simple.

The cost of investment goes beyond equity dilution. Raising capital changes your mindset — often in unhelpful ways. Here’s why I’d never raise outside capital at the idea stage ever again.
1. Investor discussions lock down bad assumptions.

As you pitch an early-stage idea, investors probe into your business assumptions. Over time, a consensus naturally forms around the most ‘investable’ assumptions. When the investor finally says ‘yes’, it feels like a form of market validation. As focus turns to planning, the latest set of bad assumptions are locked down and only come back to haunt you later on.
2. Hiring people puts a layer between you and ‘the front line’.

When you build out an idea, hundreds of tiny decisions need to be made. Raising money allows you to recruit other people to take some of those decisions for you. However, every designer, developer, marketer and salesperson you hire takes you one step further away from your customers and technology. It creates a communication overhead that’s really hard to manage — especially at the idea stage, where the learning curve is steepest.
3. Raising capital is an excuse to not skilling up.

Every successful founding team I know has had to painfully learn the basic skills needed to build their ideas themselves. This includes how to design, develop and sell their idea. A desire to raise money early often signals a lack of skills on the founding team. I’d always suggest looking for ways to fill the gaps that don’t require funding. For example, recruiting, partnerships, or — my personal favourite — learning new skills.
4. Early money encourages ‘over-building’.

To quote product development guru, Marty Cagan, “the really good teams assume that at least three-quarters of the ideas won’t perform like we hope”. The scope of ‘minimal viable product’ tends to increase proportionally with the amount of money available. All too often, funded teams tend to over complicate their products just because they can say ‘yes’.
5. Investors sound more helpful than they really are.

Don’t get me wrong, I’m a huge believer in connecting with and taking advice from people that understand startups. However, forming a solid board of voluntary advisors can be equally as helpful without raising any money at all. The truth is investors aren’t as helpful as you might think.
6. Investment requires you to ‘go all in’.

Raising money might sound like a less risky way to leave your job and focus full-time on the idea. However, given the low chance of success, it’s worth working on it on nights, holidays and weekends before putting all your chips on the table. It’s less risky for investors that can spread their risk across multiple projects.
7. Bad legal precedents will really hurt you later.

At the idea stage, you have virtually no negotiating power. Yet the first round of funding is where many important terms are agreed that form the basis of every future round of funding. Giving away the wrong terms could prevent you from raising professional investment further down the road.
8. You begin a never-ending addiction.

I meet funded founders all the time looking to raise more money in order to start selling, marketing or shipping their products. It becomes this never-ending excuse to put off the most important things they should be doing today. Herein lies the greatest dark-side to raising money. It consumes you. The easier it feels at the earliest stage, the more it takes hold of you. That’s how they get you!
So what should you if you have a business idea?

Maybe you read this and thought ‘my case is different’. While I can’t slap you out of it, I can offer you some absolutely real alternatives to raising money.

    Learn a skill. Over the last 10 years, I’ve taught myself how to write good copy, how to manage products, how to code, how to design, how to write articles, how to recruit people, how to build a following and anything I’ve needed to get to the next level. Skills are your leverage at the early stage and not money.
    Simplify your idea. It’s time to get creative. Can you serve earlier customers manually at the beginning? Can you use SMS and email instead of creating an expensive mobile app? When you take the possibility of money off the table, you’ll be surprised with how you can simplify things to get going.
    Focus on ‘ramen-profitability’. You need to think small before you can think big. Set your first goal to make enough money to live on. Maybe this is £2000 a month. Figure out how many customers you need to achieve this and how you can make it happen. Good businesses make money — the days of Twitter are long gone.

When you’re ready for funding.

Funding is appropriate for products that have some traction in a large market. For the 99 percent of companies that don’t fit this bill, external capital can be a recipe for disaster. If you’re at the invention stage, just remember that necessity is the mother of invention, not money.

This article was originally published on Inc.com. If you liked this, click the 💚 below so other people will see this here on Medium.

About Dave Bailey:
I’m a Venture Partner at Downing Ventures in London, Mentor at Google Launchpad and a serial startup founder. Previously, I built and sold tech businesses in the UK, US and Brazil. I studied at Oxford University, Stanford Graduate School of Business and Singularity University. Find my contact details on Dave-Bailey.com.

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