The itch to fundraise
I recently had the privilege of enjoying a live fireside chat with Daymond John (of Shark Tank) at SAP’s SAPPHIRE NOW 2017. As he talked about his journey from being an aspiring entrepreneur to becoming a self-made billionaire, there was something he said that struck a chord. He pointed out that lack of funds isn’t an impediment to growth, but rather can be your biggest business asset. In fact, his popular book The Power of Broke highlights that you don’t need high-profile connections or a huge start-up capital fund to succeed. This came as a refreshing break from the constant headlines about VCs and funding.
It got me wondering. Has the buzz around funding created a distorted view of success? Are we living in an era that is obsessed with funding? You are newsworthy if you’ve raised a certain amount. Your business is considered in the league of successful start-ups if you manage to raise a round of VC funding. It’s like a pre-entry requirement to being recognised as a somebody in the start-up world. Has funding has become a vanity metric?
Don’t get me wrong. There’s absolutely no problem with raising money. The problem is that money only buys you time or gives you a temporary head start. It doesn’t give you the ability to execute. Many start-ups are now allured by the illusion or comfort factor that funding provides vs. building a solid sales engine to drive their business. In fact, one can argue that getting funding at an early stage of your business can do more harm than good for your business. It gives you a cushion to survive, but it almost suppresses the desperation to make money. Not to forget that you have a lot of explaining to do to your investors with every step you take.
Of course, as always, there are exceptions; we’ve seen many companies that have systematically planned their rounds of funding and have been able to build a viable business model at the same time. So, how does a business achieve the right mind-set? Let’s look at the two different scenarios…
If you are bootstrapped, cash-strapped business…
Believe it or not, you can actually use this as a competitive advantage. This is the best way to achieve organic growth. It teaches you to be lean, to improvise and to innovate faster. It helps you develop a mind-set of frugal innovation and use resources very carefully. More importantly, it puts the power in the hands of your customer. If your consumers think your company has an attractive proposition, they will buy into it. As simple as that. Remember all those rags-to-riches stories we’ve heard time and again? Well, those business leaders were thinking from a place of strategy. Companies like Amazon and Under Armour have all done it successfully. A lot of these entrepreneurs have used the power of partnerships to build their business from scratch. For instance, partnering with the right co-founders, suppliers and marketers can make a huge difference.
If you have raised funding…
Going back to what Daymond emphasises in his book, even though your business may have received the money it requires, its primary focus should be customer acquisition. Without customers or a sales engine, your business is just burning through cash. The key, here, is to be capital-efficient.
An excerpt on techcrunch.com, by Eric Paley and Joesph Flaherty, explains: “Does instilling a sense of fiscal restraint early, where growth comes from disciplined customer acquisition, not a venture capitalist’s checkbook, lead to more sustainable businesses? It turns out the efficient companies have performed significantly better as public companies than the enriched group.
Though it’s a ridiculously small sample, look at companies that raised an objectively large sum of money—say over US$200M (nine companies in this sample), versus an equal number at the bottom of the list. The results are staggering: The 20 most efficient start-ups have appreciated by 89 per cent since their IPOs and their enriched counterparts only grew by 22 per cent in the same period.”
The bottom line is that funding is the means to an end, not the end itself. The argument isn’t against getting venture capital funding, it is about using this funding efficiently and creating growth independent of such funding.