The Questionable Glamour of Funding

Gary Vaynerchuck is someone you either love or hate.  I do both depending on my mood.  I saw this post on Business Insider today: Why do we all Praise Startups when they Receive Funding?

I couldn’t agree more with Gary V’s sentiment.  Don’t get me wrong…funding definitely has it’s place and a good relationship with investors can be a huge boon to a startup.  For example…

1. Perhaps your startup idea has a high cost of capital.  If you have to build a factory in order to launch you might need a little cash to do so.
2. VC’s and even Angels bring different perspectives and skills than the founders typically have.  If you’ve got a healthy relationship with your investors they can really help you out with their connections and advice.
3. Maybe you’ve already got a good business, but in order to get to the next level an influx of cash may be necessary to accelerate the timeline versus the slow burn of organic growth.

Still, even with respect to #1 you can often partner with someone who has manufacturing capability first, prove your market, build your brand, and then invest in your own capital to lower costs, etc.  In one of our other ventures, we’ve seen a great example of #3.  One of our competitors built their business, but only achieved marginal success initially.  They made a lot of mistakes and didn’t rake in huge profits.  During this process they learned, they built a customer base, they established a market presence.  Then they got an influx of funding and knew precisely what to spend it on based on their experience bootstrapping themselves over the previous few years.  I dismissed them beforehand, but now that I’m seeing that they’re making all the right moves with their newfound cash and some strong advice from experienced VCs I’m a bit scared.

Still, I worry that the Internet bubble didn’t teach us enough.  Especially in the web and SAAS space, the barriers to entry and cost of capital are low enough you almost can’t justify pursuit of funding before launching a minimum viable product.  To steal an idea from 37 Signals, as soon as someone hands you a ton of cash you switch into spending mode.  In contrast, smart businesses spend wisely and control costs viciously.

So why did the startup mentioned in the post who put their energy into establishing a revenue stream and building their business not get recognition while those that got funding in the absence of any revenue get applauded?  Probably because having a Startup and rubbing elbows with VCs and Angels is cool.  Building a business apparently is not.

Be cautious about the blind pursuit of funding unless you know you need it and have a plan.  Remember, as soon as someone invests the founders no longer have total control.  As soon as someone invests you may unwittingly be converting yourself from a business owner and entrepreneur into an employee.