SAI Contributor Hank Williams is a New York-based entrepreneur who recently launched a new blog: Why Does Everything Suck? Exploring the tech marketplace from 10,000 feet.
The worst thing you can do as an entrepreneur is to *need* venture capital.
I am writing about this because I get asked all the time by aspiring entrepreneurs how to raise money. My answer is always the same. Don’t!
Now to be clear, I am not saying you should not take money from investors. If they are throwing it at you, you should think seriously about taking it if you are not cash flow positive. However, particularly for first time entrepreneurs, having in your head that you will start your business by writing a business plan and then raising money is a formula for failure. Even planning to get to prototype stage and then raising money is foolish.
What you need to be doing is figuring out how to get your business operational without venture capital. Now that might mean getting friends and family money. Or it might mean working on the project part time. Or it might mean mortgaging your house (not generally recommended). Or finding partners that will work for free. Or perhaps some combination of all of the above. But whatever scale you find yourself able to operate at without *needing* venture capital, that is the scale you should operate at to give yourself the best shot.
There are several reasons for this. Raising money is hard. Raising money is time consuming. Raising money is a crap shoot. Raising money takes your energy away from focusing on building real value. If you spent today moving your business one step closer to launch, that is much better than spending your mental energy and time focusing on the unlikely possibility that someone will give you money based on some speculative document describing how all your investors are going to make billions.
But the most important reason to structure your business with the assumption that you are not going to raise venture money is that it is *much* easier to raise money when you don’t need it. You want to create what I call the “train is leaving the station” scenario.
No one wants to be stuck on the platform when something that looks like it is going to be a success is about to take off without them. Your goal as an entrepreneur is to create that feeling in your potential investors. You want to have enough momentum that they are almost (or literally) coming to you. This will be good for them because they will feel like they are getting in on something, and it will be good for you because you get to raise money without wasting a lot of time on it at the best possible price. With this strategy, everyone can be a winner.
The other benefit of this strategy is it gives you flexibility. If you start small, and don’t take *any* venture money, you are also in a much better position to take a small exit from an acquirer. A five million dollar exit would not be acceptable once you have taken venture money because the VC will take all or most of the money. Even if it would be marginally profitable, most VCs would, if they could, try to block such a deal. But for you, A five million dollar exit might be awesome if its just you and a couple of buddies.
But what if your business idea requires lots of capital that you don’t have access to? Then change the business idea! It would be imprudent to decide you were going to make the next iPhone when you have never built a website, right? You should scale the scope of your vision to what is reasonably possible for you and what you can reasonably finance, and then build on that.
In short, starting a business is like living life. It is important to figure out how to live within your means. You can start at *any* scale and be successful. Particularly today, small is beautiful.
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