When to Raise Funds

There are actually very few reasons that a startup absolutely has to raise capital. Every startup could use it. But does every startup absolutely have to raise?

May 1st, 2019   |    By: Wil Schroter    |    Tags: Seed Capital, Seed Funding

One of the most common questions we get asked is, "Should I raise capital for my business?" _What they’re really asking is, “Can you tell me how to raise money and where to find it?”_

And our stock answer is simply "No".

That tends to mess with people — because they typically aren’t expecting pushback. But the reality is that there are actually very few reasons that a startup absolutely has to raise capital. Every startup could use it. But does every startup absolutely have to raise?

Nope.

Having answered this question about a billion times, it seemed like the right time to list what the decision tree for startup Founders should be when determining they must raise capital so we can distinguish the difference between "I need it" and "I have to have it."

My (Not) Hidden Agenda

Before you think I'm all "anti-investor" here, please know that I built and run Fundable.com, which has helped startups raise over $500 million from investors.

If anything, convincing my fellow entrepreneurs not to raise capital is working against the growth of that product.

But that's not really a concern for me, or anyone on the Startups team.

All we care about is whether our fellow founders choose the best path for their startup — whether that's from investors or otherwise.

There is a Timing Issue in the Market

Every now and again —and very rarely — multiple startups emerge with a major market opportunity that happens to coincide at the exact same time.

Lyft and Uber. Bird and Lime. Amazon and whomever else was unfortunate enough to compete with them back in the early 90s.

In those cases, it's an all out arms race for a multi billion dollar opportunity that’s all about capital and timing. The only folks who can compete at that level are those who have raised substantial amounts of money for incredibly capital-intensive businesses.

Capital is king.

But, are we really in that position? Is our “next generation bluetooth pet tracking collar” really going to turn into the next major arms race for capital?

Probably not.

We have to be super sober about that fact. Yes, we could always use more capital to compete with that similar company, but no, capital probably isn't going to be the make-or-break decision in the trajectory of our startup.

We have to be real here.

Raise-Capital-2-min.jpg

Our Competition is Raising

"Oh sh*t! Our competitor just raised $2 million! We're screwed!"

When we read that press our hearts immediately sink. In our minds, $2 million compared to the $2,000 we have in our bank may as well be a billion dollars.

We picture our competition going crazy with a media blitz, hiring the best people, and being afforded every opportunity we have to pass on because they’re sitting on a mountain of cash Scrooge McDuck-style.

The truth is, companies that are better capitalized often do outperform their lesser capitalized peers, though this is mostly the case in highly-capitalized industry verticals.

Uber was able to out-muscle Lyft because they were better capitalized to offer subsidized rides and apply other capital-intensive tactics. In an industry that large, capital really does matter.

It's worth noting that the amount a company raises also matters.

$2 million may sound like a ton of money compared to what we've raised, but it's not a ton of money. With a staff of 20 people, you can rip through that funding in 18 months — which isn't a lot of runway.

So while that would go far for our staff of 2, we have to consider whether "our competition raising" is really the death knell for us, or just a mild increase in table stakes to deal with.

The Business Can't Exist Without Major Capital

There are plenty of businesses that simply can't exist without capital.

We can't build a factory or buy significant inventory without capital. In cases where we can't even get started without capital, then raising is sort of a no-brainer.

The problem is that we often confuse "the business can't exist" with "it would be a lot easier." For example, one could make the argument that if we don't have capital, we can't pay a developer to create our mobile app that we want to take to market. Therefore, we need capital.

And yet, thousands of startups launch mobile apps every year with little to no capital. Fancy that!

If what we're trying to build has been built by companies without capital, then we can exist without capital. Our issue is that we need creativity in how to acquire the resources that we need to get stuff done.

It's hard.

Raising money would be so much easier. But that doesn't mean we have to raise capital, it means that we’re raising capital because we're not willing to be savvy enough to get stuff done any other way. That’s not the same thing.

"Cool. I'm going to ignore all of this and raise anyway."

If you walk away from this thinking, "Hogwash! None of this applies to me and I need capital anyway!" that's OK. I'm not trying to talk you out of raising capital, and frankly, I hope you find it.

What I want to convey is that you're exercising the option of raising capital, but it's not the same as saying "I have no other choice."

If 100% of startups that exist today had all raised outside capital, we could make the argument that without capital, startups can't exist.

But guess what?

Only a tiny percentage of startups ever raise capital, yet millions exist. It's hard, and the road is crazy long and windy — but we all find a way to build our startups with or without capital.

The choice to raise is yours. But the need to raise is probably far less critical than you think.


About the Author

Wil Schroter

Wil Schroter is the Founder + CEO @ Startups.com, a startup platform that includes BizplanClarity, Fundable, Launchrock, and Zirtual. He started his first company at age 19 which grew to over $700 million in billings within 5 years (despite his involvement). After that he launched 8 more companies, the last 3 venture backed, to refine his learning of what not to do. He's a seasoned expert at starting companies and a total amateur at everything else.

Discuss this Article

Comments
 
Unlock Startups Unlimited

Access 20,000+ Startup Experts, 650+ masterclass videos, 1,000+ in-depth guides, and all the software tools you need to launch and grow quickly.

Already a member? Sign in

Copyright © 2022 Startups.com LLC. All rights reserved.