Season 2 - Episode 7: Do You Really Need to Raise Capital?
So far in our ongoing Startup Takeoff series we’ve touched on a number of myths around launching your business. But the Funding Myth - that you need funding to get your business off of the ground is so pervasive that we’ve opted to give it its own episode. Today we’ll cover the myths of early funding and help you understand if funding will help - or hurt - your business.
Background Story
Early funding - seed stage and series A or B - is so innately tied to the concept of starting a business that people will be very skeptical of you if you don’t have it or aren’t trying to pursue it. Dave remembered going on to sales calls and having prospective customers ask him “how much funding we had”; it’s just so universally accepted as the best way forward, but is it actually good for your business? Nah man.
And it’s not that bootstrapping has a bad rap - it’s that funding is perceived as a marker of legitimacy and business model evaluation. But straight up - it’s not. Yeah we’re biased, but we’re here to tell you that you should be focusing your startup on profit instead of funding.
Outline
The Funding Paradox: There’s a ton of data that suggests that funding doesn’t get your business further ahead. In some cases, it hurts. Still, you’ll feel crazy pressure to pursue it.
Why Funding Kinda Sucks: There are a bunch of reasons why early funding isn’t all it’s cracked up to be. See learnings below.
Profit>Funding: Instead of focusing on early funding focus on early profit. It’s what investors want anyway.
Busted Myths
There’s really one myth in this episode: that funding is a good thing for your business. It’s so pervasive in startup circles that it gets its own episode.
Learnings
According to the United States Bureau of Labor Statistics, 70% of startups fail in years 2-5. 80% of Tech and eCommerce Startups Fail. And namely, 75% of venture backed startups will fail.
We don’t want to be “we hate venture capital”. Funding is necessary in some cases for capital intensive businesses (hardware products for example…sometimes). And funding can be more helpful later once you’ve proven your business model works in the market. But early-money can paradoxically cause the collapse of your startup as opposed to fueling early growth.
Why does funding kinda suck?
You’re new to the market but you’ll be making a ton of binding promises based on your loose understanding of it.
Finding funding is a full time job. It shouldn’t be a core competency, but becomes one if your business survival is on the line.
It can be a huge waste of time - a VC firm gets an average of 1000 applications a year.
It’s probably the most expensive form of money.
Your pitch is a moment in time that your competitors can exploit.
Your investors can suck. They provide generic strategies (growth at all costs). There’s fundamental misalignment.
Funding alters your company culture.
Early profit is different. Be different. That’s actually what investors want. That’s the market telling you that you’re right and that you’re moving in the right direction at the right pace.
Oh and Bootstrapping works. 78% of businesses do it. Some biggies? Shopify, Mailchimp, GoPro, Vuori, Basecamp, etc. Google it. You can do it.
Summary
Early funding doesn’t guarantee your business success or even effectively validate your business model.
It comes with crazy strings attached, both personally and for your startup
Focus instead on early profit.
As always, ignore the haters.
Data And References
Startup Failure Rate Satistics
by Josh Howarth
November 3, 2023
https://explodingtopics.com/blog/startup-failure-stats
This site aggregates the data pretty effectively. Woot!