Money is
always a consequence, not the root cause. You work – you get paid. You sell –
customer pays. You roll the dice and get lucky – you get rich. You have a
business (plan) that works – you get funding.
But getting
funding is not the end goal, not even for a startup. The end goal is to be able
to pay all that funding back, and some more. To reach that you need to have a
business that works. For getting there, you need the right strategy. The
strategy should be all about your business: who is your customer, what is your
offering, how you plan to win etc.
The journey
from where you are today to where you need to be one day is typically so long
that you may need to top up some fuel on the way. Funding is your fuel, helping
you to get where you need to go. But it’s just a means to an end, not the
reason your startup exists and definitely not your Northern Star. It should not
be the driver for your thinking and activities, do not let “what do I need to do to get funded” to
mislead you.
Startups have different stages. Howard Love has well articulated the different stages and we have included the problem/solution fit, product/market fit and scaling “fit” for you to understand how these stages overlap each other.
Where is your startup ? What are the KPI’s relevant for the stage you are in ? Have you “overleaped” one of the stages ? What kind of verification and facts do you have ?
Depends on “what does success look like” for the Founder. But assuming the Founder acts rationally, i.e. wants to maximize her financial reward vs the effort, risk and time, the “math” works as follows: What Founder gets in her pocket = Realised Exit value (1) x Founder’s share of the company at the time of an exit (2) x time it takes to get to an exit (3) x probability of getting an exit (4)
Let’s consider 2 scenarios, A is an early stage trade sale, B is a “global category winner” On (1), A is definitely smaller, B can be much higher For (2), once you start aiming for a high level, you will need a lot of money, usually in multiple rounds, resulting in the Founder’s stake diluting to a fraction of what it was initially. A and B will have very different values, A being better for the Founder.
On (3), becoming a global champion is never cheap, easy or quick. You will expect this to take time, and in reality it will take even longer. Life goes by while you fight for your startup. A and B have very different values, A being better for the Founder. On (4), the higher you aim, the harder it becomes – if you are lucky to get to the finals of the Olympics, your competitors have all worked at least as hard as you and have sacrificed everything to be able to be the best. The odds of winning are slim. A and B have very different values, A being better for the Founder.
Do the math using the values you feel are right, and see what it looks like. Literature (business books written by entrepreneurs) gives very straight advice: take A! Example: Rand Fishkin (Lost & Founder) could have sold his company fairly early for roughly 20M, and he would have pocketed at least 60% of that. He didn’t take it. Years, and many strongly diluting funding rounds later, his company is much bigger. But there will never be an exit that would pocket him the 12M he once said no to. He regrets deeply and wants to share this with fellow founders so that they would not make the same mistake.
Revenue funded – often the most beneficial to the founders. Founders keep the full control of the company and have all options available further down the line, drawback is you have to make ends meet with less money available.
Externally funded - typically by FFF, angels or industry specific investors. Founders are still in drivers seat, but get additional financial resources. This type of money does not seek for the most aggressive multiplier with a double or nothing strategy but is more about making carefully vetted bets.
Venture funded – the high stakes game. This is the most aggressive money which is seeking for very fast growth with a very high mortality rate.
What should be noted is that all 3 strategies do allow every company to realise their full potential, there are many successful companies (even unicorn level) who have never taken VC money. The amount of money raised correlates poorly with the eventual success.
