In concluding this month’s theme on Becoming an Entrepreneur , we cover today the topic of fundraising.
All entrepreneurship starts with an idea and a belief that one has a better way of solving a problem.
To get the idea to market, cash needs to be deployed to forge the team, produce the product, find the customers and exchange product for money.
There are a number of ways to fund ideas to market.
You could fund using your savings. Or you could fund using other people’s money – family, friends, grants, incubators, accelerators, venture investors.
Using your own savings gives you the most control over your business. You can drive it in the direction you want. All the risks and rewards are yours as well.
If you use other people’s money you are bound to meet their investment objectives and at least preserve your credibility with them. There are of course grant funding that do not take any ownership from you but in most cases , when you use other people’s money, you lose some control and have to share some of your profits.
Beyond your own money and other people’s money an interesting source for funding can also be your customers. You can create a demo products and generate pre-orders online. Think of the Tesla model. You then use your customer’s money to build the product, make profit and afterwards ship to them. To me, this is the most superior fundraising strategy as you get to validate your idea and make profit as well even before making the product.
As an entrepreneur you need to always remember why fundraising is important – in the most basic form it is simply to get your idea to market.
However fundraising has come to have more implicit signals- especially when you raise money from venture investors. It serves as proof of your credibility to be able to secure support from sophisticated investors. It also signals to competition to watch how they mess around with you. It indicates to employees that they can be assured of steady salaries even if the business is burning cash. And of course the media always loves to show those smug poses of venture-backed entrepreneurs.
Raising venture backed capital comes with its own specific set of expectations. You must show addressable market size in the hundreds of billions of dollars. You must show triple digit month on month growth in revenue. You must show high double digit customer retention rate and growing double digit gross margin. At the heart of venture expectation is consistent high powered growth across all your business KPIs. You will also need to keep raising more venture funding even if you don’t need more money in order to give your investors a means for their investments to grow and doors to exit to recoup their gains.
If you are not for that type of high risk , high pressure life, do not take venture funding no matter how glamorous it looks. And yes it is okay to be boot strapped and low growth and mission driven. Its just another style of entrepreneurship.
Venture funding although now the most popular source of fundraising is really only vital if you are looking to gain market share very quickly across multiple markets. It is not the only source of funding and you will do well to consider your own style of entrepreneurship and what other sources of funding are available as well. Most important thing to note is that money is a commodity and not all funders are the same even if the money is the same. So you must pay attention to raise funding from sources that align with your mission, entrepreneurship style and which give you the most non-monetary support.