Startup Funding Doesn’t Always Create the Right Type of Acceleration

In a recent conversation with a friend (and fellow entrepreneur) we were discussing a couple of his bootstrapped initiatives. He’s struggling with the pace at which things are going, partially because he has to “pay the bills” through consulting. That time away from his startup and startup projects is hugely distracting. I know the feeling, since I’m in the middle of bootstrapping a couple initiatives and doing consulting work as well.

But this was my comment: “Money doesn’t always accelerate things.”

Correction: Money does accelerate things, but not always in the right way.

One of my favorite posts about funding (that I wrote) is this one: What Does Your Brain on Funding Look Like? For starters, the visuals still crack me up (yes, I can laugh at myself plenty.) And it’s still so damn true.

So money does accelerate things. You spend more money, things feel like they’re moving faster. But is that necessarily real and useful progress?

The minute you have money you start doing things that you otherwise wouldn’t do. You hire people. You get an office. You create (or are forced to deal with) administrative overhead. You buy fancy business cards. You do more stuff but “stuff” doesn’t equal “success”.

While bootstrappers struggle to juggle their startups (typically non-paying at the start) and paying work, funded companies are juggling a whole bunch of other issues. Probably more issues. And they can also get lulled into a false sense of security because they now have “runway.” Runway is almost a meaningless concept unless you know where you’re going. A runway ends somewhere, and if it’s ending at a cliff, who cares that you had money to spend all the way?

Funding does accelerate things. It automatically creates a sense of urgency, but not a sense of focus. It doesn’t automatically make your product better. It doesn’t guarantee anything … except that you’ll spend more money.

It Doesn’t Matter How Much Money You’re Raising, It’s Still Hard

Things certainly feel frothier these days. More and more companies are raising money, and valuations seem to be skyrocketing. But even in stronger economic times (we hope!) and bubblier eagerness to put venture and angel capital to work it’s still extremely hard to raise financing. And in many cases the amount of money you’re looking to raise isn’t particularly relevant.

Often it’s just as hard to raise $50,000 as it is $5,000,000.

And this is true for startups as much as it’s true for VCs. When VCs are ready to get a new fund off the ground they have to jump to our side of the table and raise the money. Big money. Hundreds of millions of dollars. Alan Patricof of Greycroft wrote a telling article for Business Insider titled: You Think It’s Hard To Raise Money For A Company? Try Raising It For A VC Firm.

When raising early seed money, the requirements and demands from investors will be lower. Investors can’t look at significant traction, measure revenue growth and assess a lot of metrics. But you will invest a disproportionate amount of time raising early stage capital, even if the amounts seem low. And investors are still looking for key things across the board – early stage or otherwise: a kick ass team, unfair competitive advantages, market understanding and a clear roadmap.

Read Early Exits – Exit Strategies for Entrepreneurs and Angel Investors

Early Exits BookIf you’re an entrepreneur, working at a startup, or thinking about starting a company, you should read Early Exits: Exit Strategies for Entrepreneurs and Angel Investors by Basil Peters. Basil is leading the charge on demonstrating the values and benefits of early exits. He’s definitely showing people — with concrete examples — that early exits are OK. In fact, more than OK!

Basil provides a compelling argument — specifically around financials and time — for early exits. Research shows that the more money that goes into a company (and generally that means venture capital) the longer it takes for an exit to occur. Research also shows that companies with venture capital are more likely to fail (although those that succeed tend to succeed much, much bigger — which is where we see the big wins).

The book is very quick to read. I spent a couple hours going through it and enjoyed it immensely. Basil covers some of the basic but important elements of investment, including angel investment and venture capital. Another book that’s good for that is Mastering the VC Game by Jeff Bussgang.

The most important point of Early Exits is that it walks through the steps of succeeding with an early exit. Some of those steps are common sense, others are less obvious. Having recently sold Standout Jobs, I definitely had a few “Aha!” moments. Make no mistake — an early exit isn’t easy! That’s certainly not what Basil is preaching. But the benefits are clear.

Here are three big lessons learned from Early Exits:

  1. Early exits must be orchestrated from the very beginning. This is one of the key lessons from the book. If you’re not orchestrating and planning for an early exit, it doesn’t just pop out of nowhere and happen. Startups have to work at building towards an early exit from day one. Basil recommends having a list of 100 or so potential acquirers for a business before you even start! And he points out that he won’t invest in a startup unless the path to exit and the list of acquirers is clear and substantial. Startups need to have an early exit mindset from the get go.
  2. Alignment is therefore essential. Clearly everyone has to be on the same page within a startup for it to succeed with an early exit. Alignment is absolutely critical between the founders, employees and investors. A surprising number of entrepreneurs (some that are featured in the book) have stories about trying to exit early (because it would be a big financial win for them) only to have the sale blocked by investors because they wanted to see a higher return.
  3. A well-run process for selling your startup will significantly increase the sale price. There are numerous examples in the book that demonstrate how startups got a 50% boost in sale price by having a well-run exit strategy and process. That kind of kicker can have a huge impact on what founders and investors walk away with! The book goes through the keys to running a good sale process, and the gotchas that people run into.

Early exits aren’t bad. They’re not appropriate in all circumstances, but they’re not bad. In many cases they can be very, very, very good. If you’re just founding a startup or you’re in the middle of one, go read Early Exits.

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Ben Yoskovitz
I'm VP Product at GoInstant.

I'm also a Founding Partner at Year One Labs, an early stage accelerator in Montreal. Previously I founded Standout Jobs (and sold it). MY BIO >>

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