## Raising Money is a Means, Not an End

# “All that glitters is not gold.”

## William Shakespeare

For many entrepreneurs, raising money has replaced the primary goal—building a stable business. This is a significant mistake. When you take money from investors, their business model becomes yours.

Entrepreneurs need to consider:

• When to raise money
• Why to raise money
• From whom to raise money
• What the consequences will be

Everything starts with understanding what a startup is.

# What is a Startup?

A startup is a temporary organization designed to search for a repeatable and scalable business model. Let’s break down this definition carefully:

• Temporary Organization: The goal of a startup is not to remain a startup but to grow into a larger scale. (If you have no goal to scale, then you shouldn’t seek money from business angels or venture capital firms but rather get a small commercial or government loan to develop your business.)

• Search: Although you might be convinced that you are the creator of the most brilliant innovation ever conceived, the likelihood is high that this isn’t the case. If you attract millions of dollars on day one to implement such a project, you’ll spend all that money trying to develop a bad idea.

• Repeatability: The source of orders for a startup can be personal relationships of board members with clients or the heroic solo efforts of the CEO. All is well, but the sales department won’t be able to replicate this. You need not one-time hits, but a repeatable pattern that the sales team or visitors to your website can reproduce.

• Scalability: Your task is to acquire not just one, but many customers, in such a way that each new customer brings more revenue and profit. Check: if you hire another sales manager or spend more on marketing, will your revenue exceed your costs?

• Business Model: The business model answers the fundamental questions of your entire business:

  • Who are your customers?
  • What problems do they want to solve?
  • Does your product or service solve the customers’ problems? (Product-market fit)
  • How to attract, retain, and grow customers?
  • What are the revenue strategies and pricing tactics?
  • Who are the partners?
  • What resources and actions are needed to launch this business?
  • And what will the expenses be?

# From Whom to Raise Money?

First, determine the type of your startup. If you are a “lifestyle entrepreneur” or have a small business, then the return on investment you can provide is likely not interesting to business angels and venture capital investors. These types of startups are better suited for raising money from friends and family, commercial or government loans for small business development, etc.

If you are a growing startup, you should spend small amounts of money (seed funding) on experiments to test your hypothesis. Why small amounts? No startup ever spends less than it raises. At this early stage, you’ll have to give up a larger share of your company to investors. Initial investments can come from friends, family, Kickstarter, business angels, and, most importantly, the first customers.

These sources of funding are much more tolerant of adjustments and changes to the business model than late-stage venture capital firms.

# When to Raise Money?

In the Lean Startup model, your goal is to conserve money until you find a repeatable and scalable business model. In times of unlimited money flow (like internet bubbles and risky enterprises), it’s easy to fix your own mistakes by injecting more money. In normal times, when there’s no extra money to “cancel” mistakes, you use the customer development methodology to tailor a product that fits the market (value proposition for a customer segment—in business modeling language). Only after you achieve this, can you spend money as if it would never run out.

Do not confuse raising funding with building a stable business. In an ideal world, you would never need investors—you would finance your business from sales revenue. But to grow, a startup needs venture capital.

Raise as much money as you can—but not before you have tangible evidence that you’ve found a product that the market needs.

# Consequences of Venture Funding

At the moment you raise money from a venture investor, you also agree to adopt their business model.

Here’s a simple test: if you’re the founder of a startup, stand up and draw a diagram of how venture capital works. How do the fund and partners make money? What is the internal rate of return? What is the lifespan of the fund? How much do they invest in the life of your company? What share do they need to own at the liquidity event? What will they consider as their success? Why?

There are two reasons to take venture capital money:

1. Scaling the Business: You plan to scale your business as if tomorrow would never come. You invest this money to create demand among end-users and attract them into your sales channel.
2. Experience and Networks: The experience, knowledge of schemes, and contacts that good investors are willing to share.

Just make sure that you choose the right time.

# Lessons Learned

• Raising money is a means, not an end.
• Conserve your money until you find a repeatable and scalable business model.
• Focus on product-market fit.
• Conduct small experiments to test your hypothesis.
• Raise as much money as you can after you have tangible evidence that your product is needed by the market.