I want to start out by saying I am not against startups raising funds, but it is important to recognize fundraising for what it is, and how it can impede your company’s growth and development if used incorrectly. Post accelerator, the primary purpose of receiving funding is for growth. The business model should have true product-market fit, the channels in which you reach your target customer are identified and the business can actually scale efficiently. Many startups make the mistake of fundraising while still discovering their business model. Our $2 MM seed fund has been pitched hundreds of times by startups claiming they are ready for funding and they haven't even confirmed who their customers are yet, which in our opinion is the most crucial step in figuring out if you’re solving the right problem. There are some pretty amazing fundraisers out there but definitely more dumb money than pitch wizards.
A successful fundraising round can create a false sense of success. Founders get confident and comfortable with a full bank account and extended runway. With this false "crutch" they often become lazy and incapable of managing burn rate. Startups who get prematurely funded can also find themselves in an unhealthy time crunch. Along with large funding packages come timelines and in order to stay ahead of the burn one must quickly develop and grow. "I hope you have explosive growth, because you have to," Limor Fried, Founder and Owner of Adafruit Industries joked of venture-backed startups. Fried’s bootstrapped business has grown slowly, but steadily over the last ten years, and is now afforded time (thanks to its lack of outside investors) to bring new and fully developed projects to light.
“By the time I found out what VCs were, I was already making millions in profit, and I didn’t see the need to raise money”
Since we’re on the subject of time, let’s ask ourselves, with the thoughts above in mind, is time better spent testing our product with consumers, or pitching an unproven concept to VC’s? In most cases, time is much better spent coming up with a solid business model and finding a niche market for your product. If you spend twenty hours fundraising in a given week with no results, but can spend twenty hours a week talking to customers and possibly selling a few, maybe your time is better spent selling. Actually, I know your time is better spent talking to customers because what you will learn from customer feedback will be far greater than the feedback from investors! Markus Frind, Founder of Plenty of Fish dating site, which was recently acquired by Match Group for $575 million made the following comment in Business Insider, "By the time I found out what VCs were, I was already making millions in profit, and I didn't see the need to raise money because I wouldn't know what to do with it. It was a profitable company, and there was no need to raise money." Markus says he created Plenty of Fish “...as a way to improve my resume. I just went and created the site in two weeks, and then people started signing up, much to my surprise," he said. "And it blew up from there. It wasn't like I had a plan to create a dating site. It was just a side project I created that got really big. Startups that bootstrap tend to have more polished and sophisticated products because the company brain trust’s heart and soul is poured into their development."
The simple truth is that people make more thoughtful and weighed decisions when they have skin in the game. This applies to decisions as they pertain to money, time, and resources. A prime example of this more measured approach to startup growth can be found in the model of Meister Labs which boasts over 4 million users. “We had seen people willing to pay, so we made the decision to go for a funding round. We had almost 100,000 users by then, and we were still growing. We jumped — and raised €550,000 in seed money, which helped us pay our debts and finalize the product. We had to give up some shares, of course, and we lost a little bit of freedom. But overall, it was a good decision. About a year later, we hit the break-even mark at €15K MRR.”- Michael Hollauf, Till Vollmer Co-founders of Meister Labs and Meister Task.
We often hear “patience is a virtue” and while it can come off as cliché, wisdom is wisdom, and it’s our stance that it applies to startups as well. At Seed Sumo one of our Core Values is "Action Speaks Louder Than Words" maybe we should change it to "Traction Speaks Louder Than Words"?