In today’s Tech startup scene fundraising is the focal point for most early stage startups. But is it possible to get your venture off the ground without VC funding at the early stages?
I get asked this question A LOT.
It’s an interesting question and from my own personal experience, my answer would be Yes. However, it comes with a warning, as this route is not for the faint-hearted. It’s bloody hard and requires the hustle of the century, but there are major keys to launching this way.
We often hear you have to be quick to market with a tech startup and the only way to do that is by raising VC funding in the very early stages. VC’s will help you scale and build your business, but we know that startups expecting the VC money to do most of the groundwork will usually fail within the first few years.
We seem to be in such a hurry to grow crazy fast, but interestingly enough the number one reason for failure according to Startup Genome report extra is startups scaling too early.
The reality is that up to 92% of VC funded startups fail within the first 3 years because of premature scaling and under performance. This is the number one factor which prevents them from raising further rounds. By premature scaling I generally mean one of two things 1. Spending on marketing and hiring without nailing their problem solution fit. 2. Burning cash too quickly whilst underperforming and failing to secure further funding.
Is it possible to raise too early?
Another mistake startups make is raising capital too early before they have really nailed their product market fit. Raising too early can be more detrimental to the growth of your startup than good if you haven’t spent sufficient time validating your product. You will end up spending cash on things you don’t need, whilst underperforming because of lack of problem solution fit . Eventually you will run out of cash and be unable to raise further rounds. Then you will be left with no choice but to say bye bye startup life!
Picture this scenario, kind of like the Tortoise and the Hare. You have an idea, a committed founding team and you happen to raise a seed round with a VC fund. You are on a fast track to being a Unicorn (you think). Problem is you’ve underestimated the time you need to validate your market, your figures don’t add up and you end up blowing a load of cash unnecessarily and fail to meet the targets set by your investors. Your poor performance then shuts the door on raising any further cash and your business tanks. It sounds painful but this is the reality for the majority of early stage VC funded founders.
Meanwhile somewhere in the ecosystem, the somewhat slower but steadier startup manages to secure their place in the market because they spent more time validating it and building what their customers actually wanted. They spent less time burning cash on assumptions which led them to much greater returns in the long run. Remember what you overlook in the early stages of validation will come to bite you in the ass sooner or later.
Does this mean I shouldn’t raise VC funding?
Absolutely not! By no means am I saying put a VC raise off the agenda, but in the idea stages don’t obsess over it. If you can manage to boot strap to series A then you are a total bad ass. But it’s not feasible for everyone. The tech startups that managed to take this route at the early stages include Techcrunch, Github, Plenty of fish, Indeed jobs and Behance to name a few. The reality is most of us might need to raise a VC round not only for the cash but for the added value the VC firm may bring in helping you scale. It’s your job as a founder to decide when you need to raise capital for your startup, but ultimately seeking VC investment should be held off until you are truly ready to scale and you can be sure your startup has wings.
Raising funds from friends, family or private Angels.
Another option you may want to consider is raising from friends, family or angel investors. Angel investment is a great way to raise capital from high net worth individuals within your network. Ideally your Angels will have a level of knowledge of expertise in the area you are building. Angel investing is by far an easier route to capital than VC money. The due diligence processes are less arduous and the founder generally has the freedom to execute their vision without the pressures of VC KPI’s. Not that pressure to succeed isn’t a good thing, but sometimes you need to take your time with getting the product validation right so you can build something your users actually want.
Be brave and Boot strap a bit.
Until then bootstrapping can be awesome training and a great way to discipline your focus on ensuring revenues are higher than your costs. Bootstrapping can also give you more freedom to plan for the long term gains of the business rather than be pressured into the short term wins expected by your investors. Essentially bootstrapping may look like investing your personal funds, your salary, savings, borrowing from loved ones , debt finance or if applicable cash flow straight into the business and operating on a lean budget with a super low burn rate to sustain your build. It’s by far the road less traveled and not the easiest route, but Bootstrapping your tech startup will give you more control, greater returns, and a higher success rate.
No matter which way you look at it the moral of the story is in the early stages of your business focus on the product and traction, because once you nail it, you will increase your valuation and if you are winging the deals then let your P & L do the talking. Picture VC’s chasing you down rather than you chasing them... Now wouldn’t that be something?