We all know how this works don’t we. When we start our business, we plough money in from friends and family, we put our savings into the business and we agonise about when the side-hustle is strong enough to become a “real business”.
Very soon after we take this step off the cliff into the world of the full-time business owner we are off down the route of seed funding, then series A and B and C and so on. Growth is everything and we need the money these funding rounds bring to drive our growth. The last few years have seen this become a standard business model, with many companies failing as the money runs out and the revenue doesn’t appear. I think the days of “growth at all costs” businesses are close to over and investors are going back to basics. They really are now starting to ask questions of founders about when they will become cash positive and listening to the answers with more interest.
There certainly are reasons why taking investors cash early can stifle your business and place it into trouble early, despite the money that these investors put into your business. Never forget that significant investors that are not in your immediate circle of friends and family are basically placing bets on you and your business. They are doing the same with many more. I’m not saying that they don’t care about what happens to your business, they do, but they care about many others too, and they only need one or two to “win big” to make the losers vanish into memory. It’s not the same for you. Your life becomes the business and the risks for you are much higher, especially in your personal life. So why do you take outside investment when perhaps by modifying your business plan and your approach you don’t need to?
I simply don’t buy into the theory that you have to be the first in a market. A good business approach is to be the last into the market, watching all the mistakes others make, all the money they waste, all the clients and consumers they disappoint and then producing a business that does just what the client or consumer loves, displacing the first mover and the other competitors with a business plan which is purely customer focussed. Too many business plans I have seen recently are founder focussed. They think about the idea rather than addressing the opportunity. If you can be the last into the market, with a product or service consumers love, that is the path to riches and happiness.
I highlight this simply because I do think founders often seek significant investment too early. They think it is easy to raise money, but it isn’t. It is also very distracting. I like to see a business get some revenues before they start seeking big money for massive growth. It’s good to see a business become cash positive no matter how small the sums are. By doing this you are starting to prove there is a requirement for what you are selling, and the question then becomes, can it scale and what does it need to help it scale?
There are some other reasons for not seeking significant investment too early.
If you raise too early inevitably founders and their friends and family tend to end up with a massive dilution of their ownership. It is better to raise when your business is worth something and if you can get your business through some significant trigger points without additional funding, such as real revenue generation or a cash positive position your business value starts to soar. Instead of raising a million dollars against a business worth two million, you could be looking to raise a million dollars against a business worth five million. Raising early gets you less because investors are looking at how many unanswered questions and risks there are associated with your business plan. Progress, albeit slightly slower removes these types of questions in investors’ minds.
The other thing to recognise is that when you raise funds through institutions such as private equity or venture capital businesses these investments come with conditions. Reporting requirements can suddenly become much more significant for example. You will almost certainly find yourself in more “information giving” meetings than you would ideally like, and all this is distracting you from your primary purpose, running and growing your business. Now, it is unfair to say that the people inside the PE and VC firms that may invest in you do not provide value, they very often do. But you must decide on the best time to use that advice and value, and many founders do it too early.
So, if you are being warned away from taking investors’ money too early, what is the alternative?
Well, one way is to examine your own business model and pricing approach. Only this morning a friend and colleague of mine, when talking about a software business we are invested in made a great point. Instead of calling a first use of the product a “proof of concept” sell it as a “consulting engagement” or a “training course”. Instead of a proof of concept for this new software being free, it became a cash generating opportunity that just happened to also prove the software worked and was of value to the client receiving the training. It was, after all, replacing home built, spreadsheet applications.
In a similar way you may want to look at ways to engineer your new business and present it as a subscription model, or a pay-in-advance model, such as those used in project work which is often carried out based upon “stage payments”. So many of these are starting up now where the founders are discovering ways to get their consumers and clients to make some form, if not all, of their payment up front, before delivery.
So, if you are just starting to build your business do not worry if you are not growing in the same way that some of the Silicon Valley unicorns did. Firstly, not everybody can do this, and secondly, the pressures really start to appear for these businesses when they have their first bad set of quarterly results, or their growth starts to slow. Their value drops and their investors start to consume more and more of the founder’s time, often distracting them from running the business or replacing them with others.
Look at your business model. Make it very customer or client focussed and make sure that you can derive ways, very early on, where you can have them part with cash earlier in the relationship. In this way you will not seek additional investment too early, you will stay closer to doing what you do best, and you will own more of it for longer allowing your share of it to expand in value more quickly than it would if you diluted your stake holding by seeking money to early against a low valuation.