Let’s be honest, fundraising is a major chapter in every startup’s success story. It’s one of the most exciting, terrifying, and rewarding parts of starting a company. Having a stranger write you a check for six or seven figures not only validates your idea, but it validates yourself as an entrepreneur. Clearly, others believe in you enough to put their money where their mouth is. I myself have raised over $1 million for my startup, Buddytruk, as well have written several articles on how to fundraise for your business and how much to ask for. That said, there are several reasons why you should not fundraise when starting a business, and given today’s venture landscape, now may be a better time than ever to bootstrap your company to success. Here are five reasons you should pass on fundraising and investor meetings in 2016:
1. Money can’t solve your problems.
By far, the most common mistake every founder makes when starting a business is adopting the mentality that “if only we had $X, we could do this.” I’m here to tell you, that’s simply not true. More money in the bank account does give you more ‘options’, but more times than not, especially as it relates to a startup, this means more ways to spend money you shouldn’t be spending, on people, marketing, offices and equipment you can’t really afford. I can’t believe how many startups raise money and go straight to spending it on “swag.” I’m sorry Pied Piper, but I do not want a t-shirt or coffee mug with your logo on it. Money should be used as a tool to generate more money, not to prolong the life of your poor business model.
2. You’re in business to make money.
If thinking “money can solve my problems” is the most common mental mistake founders make, thinking “I need to do X so I can raise more money” is a close second. Several startups, including my own at times, spend way too much time trying to hit growth metrics that will help “secure more funding” instead of finding ways to turn a profit. I remember a time at Buddytruk where we were told that if we could do X amount of deliveries a month, we’d be a very attractive Series A investment. So what did we do? We dropped everything and chased that metric exclusively. We gave out huge discounts to use the product, including first-time free deliveries and marketing to users who would have never otherwise used the product. We ended up hitting that metric, but it almost bankrupt the company.
3. Fundraising is not running a business.
Most startups have a very small team, maybe only a couple of people, and as a founder, you may think your job is to fundraise. You’re right. But for the most part, fundraising takes you away from your business, which can be catastrophic when a company is in its infancy. Think about it, time is a fixed resource, and your company can only grow when the team is spending their time growing it. If you have a team of three, but one person is out fundraising, the total “team time” spend running the business is now equal to (person’s time x 2). This means a team of three has 50 percent more time and energy to spend growing a business than a team of two does, making fundraising a very “costly” use of time. The worst part? Fundraising all the time will make you a better fundraiser, but it won’t make you a better CEO. In fact, spending so much time away from the business, especially in the beginning when you’re still figuring everything out, often times can have the opposite effect.
4. Mo’ money, mo’ problems.
Investors are problem creators, not problem solvers. Several investors will tell you they’re “value-add” investors, and several investors will be lying. Although some investors can be a great soundboard for ideas, serve as an advisor, or be a good intro to more capital or your next strategic partner, they’ll never be able to run your business for you. The person with the most information makes the best decisions, and in the case of your company, nobody in the world has as much information as you do. Several founders naively believe that their investors have the same goals that they have, but that’s simply not true. An investor’s goal is to make a return on their investment, not to “change the world of animation forever” or to “be the industry leader in plastics manufacturing.” At best, they care about your company’s success because it results in a return on their investment, at worst they’re just hoping for a quick acquisition by a larger player in your space. Now I’m not saying investors are “bad,” in fact, I’m an investor myself in several companies. All I’m saying is their interests are often different than your own, and in the early days when the “sole focus” should be on building your business, having several different (and sometimes conflicting) interests may do more harm than good.
5. Bootstrapped companies are “investable.”
Ironically, there is nothing more attractive to an investor than a business that doesn’t need their capital. As a bootstrapped company, you and your team have spent all your focus on building your business, and none on “raising money.” You’ve found a way to generate positive cash flow, acquire customers affordably and reinvest your earnings in a way that will lead to an even greater return on equity in the future. Maybe most importantly to an investor, you’ve proven that you can manage money responsibly, and that you can turn your own money into more money. What investor doesn’t want to invest in a person or business that can do that? I know I do.