Raising money is a means, not an end in itself.

"Not everything is golden that glitters."
William Shakespeare

For many entrepreneurs, attracting money has replaced the main goal - the creation of a stable business. And this is a big mistake. When you take money from investors, their business model becomes yours.
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One of my former students came to talk about his startup. When I asked: “What are you working on right now?”, He first of all spoke about how the attraction of financing was progressing. Eh ... But I should have heard about the search for a business model, about the successes in finding an interesting product for the market, but in 90% of cases, I first hear the story about raising money. And it does not please me at all.

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

And it all starts with an understanding of what a startup is.

What is a startup?

Let me remind you: a startup is a temporary organization created to find a repeatable and scalable business model. This proposal should be carefully analyzed:

• Temporary organization . The goal of a startup is not to remain a startup, but to grow to a larger scale. (If you do not 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 government 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 the case. And if you attract millions of dollars on the very 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 the personal relations of the members of the board of directors with customers, and the heroic sole efforts of the general director. All this is good, but the sales service will not be able to repeat it. You need not one-time hits, but a repeatable pattern that can be played by the sales service or visitors to your site.
• Scalable . Your task is to get not one, but many buyers, and so that each new buyer brings more revenue and profit. Check: if you take another sales person or spend more money on marketing, will your income exceed your costs?
• Business model A business model answers the basic questions of your entire business. Who are your consumers? What problems do they want to solve? Does your product or service solve a consumer problem (matching product to market)? How to attract, keep 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 the money from?

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

If you are an expanding 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 investment can be provided by friends, family, Kickstarter, business angels and, most importantly, first customers.

These sources of funds are much more tolerant to adjustments and changing business models than late-stage venture capital funds.

When to attract money?

In the Lean Startup model, your goal is to save money until you find a repeatable and scalable business model. In times of unlimited flow of money (Internet bubbles and risky enterprises), correcting your own mistakes is easy - by pouring in even more money. In ordinary times, when there is no extra money for “canceling” mistakes, you use the methodology of consumer development to select a product that exactly matches the market (value proposition for the consumer segment - in business modeling language). 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 you need for the market.

Implications of Venture Financing

At the moment when you raised money to a venture capitalist, you also agreed to adopt its business model.

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

There are two reasons to take venture money. The first is that you are going to expand the business as if tomorrow will never come. You invest this money to create demand among end users 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.
• Attract as much money as you can after you have received tangible evidence that your product is needed by the market.

About the translator

The article is translated in Alconost.

Alconost is engaged in the localization of applications, games and websites in 60 languages. Language translators, linguistic testing, cloud platform with API, continuous localization, 24/7 project managers, any formats of string resources.

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