One thing I’ve observed in startups is the temptation of the founder/entrepreneur to view fundraising as their most important goal instead of a means to an end. Entrepreneurs chase their first round and then their next round and talk about A rounds and B rounds and C rounds. Fundraising from VCs is typically difficult and for most companies that do raise venture capital (a tiny percentage of all privately held companies that are started up by the way), the path is a long one. Along that road the entrepreneur gets to meet with a lot of smart people – the VCs – who may or may not validate them. But that validation proves nothing just as raising money proves nothing. Raising money now in order to be able to do something to then raise money again is not much of a business plan but in early stage companies sometimes becomes one. You hear entrepreneurs talk about “if we do X, Y and Z, then VC fund Q will invest in our C round at a big step up to our B round and etc. etc.”. The problem? None of this actually creates any value. No one actually makes money when new money is raised, instead it just increases the denominator in the ROI calculation. The more capital you raise, the more profit you have to eventually produce before anyone ever makes any money. An obvious and simple concept that sometimes becomes obscured.
The problem is further compounded because the tech/startup press writes about fundings as if they are an accomplishment onto themselves and the press often celebrates those companies that have raised a lot of money. The reason for this is because the press needs news and fundraising stories are current news – it’s not the journalist problem 3 years down the road that the company has not made any money with the money raised.
If you don’t use that money to make a lot of money – you don’t ever build value. And when the money raised is equity – as it always is with VC money – it’s money that is on your balance sheet forever – you can’t ever pay it back and have it out of your life. You are married to the VC with no chance for divorce even if the VC firm dies as many VC firms are doing and will continue to do. (Picking your VC carefully is a topic for another post…) As my business partner Ariel says “mid-term valuations used in private financings, if not based on a multiple of income, FCF, or EBITDA are simply the lies everyone tells themselves. The only thing that matters is whether you actually make cold hard cash. Sometimes that cash will trade at a big multiple, sometimes at a small multiple but despite the fads that are multiples and hot or cold sectors, cash never goes out of style.”
Raising money is hard and it’s often gating to growing a business but in and of itself, it means absolutely nothing. I’ve seen it captivate good entrepreneurs far more than it should. Every minute spent raising money is a minute not spent being creative and building products that people want to spend their money on and therefore a minute not spent on actually creating wealth. Since many more companies raise money than ever make much, it seems that there is a lot of evidence that raising money – as hard as it is – is easier than making money. Something to think about when you are reading your press release about how much money you recently raised.
