Your answer to when to raise venture capital for your startup might define the future of your company. Covid has brought massive disruption to the global economy in a new way. At least in my time, disruption has been driven by technology, not by sudden social changes that affect the entire globe. We need to rethink the role of building companies in such a volatile environment.
Remember, do not raise venture capital in the early part of your journey
If you asked me six months ago when to raise venture capital for startup, I would suggest 100 ways not to raise capital in the early part of your journey. Raising capital needs a different skill set than building your company. It is expensive and incredibly time-consuming to raise venture capital, especially if you don’t have the fundamentals to show.
First, ask yourself if you are building a startup or a small business. Creating a global software platform to disrupt the financial industry is different from opening a bar. If you don’t know the difference, ask yourself if starting can generate a 40x Investment Multiple, a Venture Capital Investor is looking for. A software company can do that; a bar is limited by the customers you can fit regardless of how amazing your cocktails might be.
Your focus needs to be on how to get a product ready and generate cash flow. Period! So, let’s say you can get 20,000 Dollars together from Family and Friends to develop your app. You can come to Silicon Valley for one month trying to raise venture capital for your startup, or you can come to Bali and live off that money for 18 months where you design test, and release your app.
Don’t raise money unless you have a product to show and started building some revenue and traction in the market. Obsess about these factors, create a problem-solving solution that people will want to buy. With enough time and effort, you will always find that Eskimo that will buy a fridge from you. But that does not mean that you are great at sales; it just means that you are hopelessly wasting your time.
Create value for your customers and improve their lives
Create Value for your customers and improve their lives in some meaningful way. All talk of raising money will distract you and bring everyone to the question of their cut? How much sweat equity will they get? What is the valuation of the company? To most of these questions, there is no answer. There is zero validation unless anyone is interested in your product to the point that they are willing to pay for it.
So how much is your Business worth? Not much! Plain and Simple. Your Business is worth nothing at this point and is the reason why the first money you raise can become the most expensive capital you can ever imagine.
If you happen to be successful, it will be almost impossible to get rid of that investor ever. Even if you choose your partner well, things change. People change, they become alcoholics or depressed, they might even die, and suddenly you are dealing with their kids. Some people become complete egomaniacs just because they are finally associated with success. They are only my personal experiences; I am sure that there are many more.
What is the best early-stage investor to raise venture capital?
So, what is the best early-stage investor? The one you don’t need. There are other ways to incentivize people who can help you share of future profits, options in future funding rounds, discounts, future payment. Hold on to your shares! Unless you co-founded Paypal, you would lose most of your equity in future investment rounds anyway.
After a decade, if they had worked with founders who killed themselves to build their companies, owning 2% of the shares by the time the company started to become successful.
One thing has changed over the last months that I have to rethink as well. Who is doing well in these days of Covid Response? Looking around in Bali, it is those Businesses with access to capital and those without the overhead. I decided two years ago to go low budget, move operations to Bali, cut staff from 160 to 4, get rid of all office spaces, and stop traveling and becoming a lean, mean zoom machine.
We can scale up and down super-fast, depending on the availability of capital. Otherwise, right now, you might lose your business simply because you temporarily cannot pay the rent to keep your staff. Most Companies do have an overhead; there are only a few things that you can adjust quickly.
Start reaching before start raising
Maybe the answer is to build traction and access to the capital early. Start reaching out months before you start raising. Put the idea into people’s minds and then let them judge you on your progress. Your track record is the best indication of how you will develop in the future. Invite people early to share the ride with you, so months later, you are not starting from scratch when you do have a first product, traction, and revenue.
Unless you live in jealousy driven societies like Germany, people will want to see you succeed because you solve problems. Otherwise, there is no reason for a Startup.
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