Getting Funding is NOT a Strategy

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

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 ?

What kind of an Exit is best for the Founder?

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.

What alternatives do I have for funding my startup?

Cut­ting cor­ners, 3 main types:

  1. 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.
  2. 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.
  3. 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.