I run into a fair amount of entrepreneurs who want to raise money from investors for their business. When I ask them a few questions about why they want to raise money, I usually get some combination of the following answers:
1 – We need money to hire a team.
2 – We have a great product but need cash to scale sales efforts.
3 – The market timing is right to accelerate growth. It’s a land grab for market share!
I think these are all legitimate answers. However, and this is a BIG however, the vast majority of the people giving these answers don’t have enough customer interactions to really know if 1 – 3 will take their business to the next level. They think it will. They believe it will. They have no realistic basis to know it will. There are certainly no guarantees, but every customer you work with is one step closer to understanding what you need to do with your business to make it really grow. The ironic thing is the more you do this, the more customer success you will find and the easier it will be to raise money.
Put yourself in a position to have enough customers to not NEED investor money to survive. Raise money if you can crank hard on the 1 – 3 list above.
Like I said, they are legitimate reasons to raise money. Just make sure you are really in a position to execute on those items before you think about investors. It takes a lot of time to raise money. It can be a lot of wasted time if you really aren’t ready. The market generally has a way of funding businesses that have a chance of being big. The more customers you have, the more ready you are. You should be iterating on a business model (NOT a business plan), working with customers early and often, user testing products, a/b testing different looks, and a employing myriad of other forms of testing that are available in mass quantities to today’s entrepreneur.
Shame on you if you aren’t doing all of this maniacally BEFORE you even think about raising money.
If you are, awesome. You’ll survive and figure out if you have a business that can be one of the few to scale rapidly and possibly raise money to really go for it.
Think long and hard about when or if you need outside cash to get to the next step of your business. I’m not considering the contribution that investors make outside of cash. That is for another post. Let me just say that the “right” investors actually bring much MORE than cash to your business. However, finding the right investors, and their cash, is a new layer of difficulty in it’s own right. (Disclosure: we recently found investors that bring WAY more than cash to the table — Highway 12 Ventures and GSAVP)
Anyhow, I digress…
You may also do all of this testing and work with customers only to realize you can build a really nice business that won’t need investor money. In fact, you may find that you have a business that SHOULDN’T raise investor money. That is about 98% of the companies out there. You can still kick butt and have an incredible company! It’s important to remember that many great businesses are not going to be large enough to entice investors to come aboard. As such, I’d say plan to build a business with customers funding your business, not investors. Maybe you’ll break thru and reconsider down the road, but this is the proper default setting in my experience.
It’s a really simple concept; customers fund your business operations thru purchasing your product. Like a lot of things though, the concept is simple but the execution is not. Where are you in the customer acquisition process? Are you funding your business thru customer dollars, your own, investors, or a combination? Let us know what is working for you in the comments.
About Alex Lawrence
