Hello and welcome back to Startup Curious, where we discuss things you should know if you’re thinking about working for or starting a startup.
Today, we’re going to talk about the downsides of raising money. This is a fairly important topic that I think should be discussed a bit more. It’s easy to get caught up in the perceived glamour of raising millions of dollars, but the truth is - running a venture backed company isn’t for everyone.
Now, for this episode, I’m going to specifically be talking about raising money from VCs, which is the most typical scenario you’re seeing when you see headlines like “Company X raises $5m to revolutionize their industry.” There are other ways of getting capital infusions into your company, each with their own pros and cons. That does include raising from VCs, by the way - I’m going to only highlight the cons here but there are plenty of benefits as well.
Okay, so when it comes to raising venture capital, the thing to realize is that you’re about to step on a treadmill that’s very, very difficult to get off of. Essentially, when you’re raising money, you’re trying to raise enough to get you to some major milestone… but for many companies, that milestone just means they’ve unlocked the ability to go out and… raise more money. This continues for 10 years until you hit some kind of milestone that means you can exit (get acquired or go public).
Of course, this isn’t true of every company - some companies are able to raise once and never have to raise again. However, it’s tough to develop a product and business model that allows for this (just like not every business model is bootstrappable).
Another downside of raising money is the added pressure that comes when adding more people with a vested interest in your success. Some of it will be direct pressure from investors, but even if you have very laid back investors, you’ll likely still feel additional pressure, because humans tend to not like letting other humans down. While a lot of founders find this added pressure helpful because it tends to help them speed up, some find it a distraction, and would prefer to grow at their own pace.
The last downside of raising money I want to discuss is bad habits. The ultimate goal in raising money is to eventually get to a milestone where you don’t need to raise money anymore. This means the business likely has to be profitable at some point. However, if you’re able to infuse a ton of money into your business without worrying about actually making sales, then it’ll be more difficult to develop habits that lead to profitability. Essentially… you get spoiled.
Now, many companies do need to go through a phase where they don’t worry too much about profitability, and instead focus on running tons of experiments. Some of them will be a complete waste of money, and that’s okay. However, the goal should always be to get information that will lead you to make more profitable decisions in the future… not just burn as much money as possible to get users.
Okay, so… what should you do if everything I said above sounds like your worst nightmare? Well, unless you’re very wealthy and can self-finance, you should figure out if the business you want to start is bootstrappable. Not every business is, but many can become bootstrappable with some strategic modifications. If it’s not bootstrappable, then do some research into things like crowdfunding and loans, and see if those would work for your business.
And, just a reminder - I wanted to focus on the negatives of raising venture capital here, but there are definitely positives as well. When deciding what path you want to take with your company, consider all of your options. There no one size fits all path here!
Thank you for joining us today! If you found this episode useful, please remember to subscribe and share. Our goal is to make startups more approachable for everyone and the only way we can do that is to get the word out!
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What are the downsides of raising venture capital?