Raising Money Or Making Money: That’s The Question!
Every startup founder/CEO is constantly thinking about money. Do we have enough? Should I raise more? Where will it allow me to go with my business? In the startup world raising a significant round of funding is often considered a huge achievement and often the number one priority for anyone who runs a company. It seems that success is often measured by how much investment you have been able to bring into your startup, and if you do not have a big investment you can be treated like a failure even if you are making a profit. You often get questions such as “Is everything ok?,” “Is your business not doing too well?,” or “Are you struggling to scale?.” From my observation, the startups with small investments and which are able to make money and successfully scale – even making a profit – can be viewed unfavorably when compared to bigger startups which have raised hundreds of millions of dollars and are selling large portions of their businesses to investors. Examples such as AirBnB or Uber which have taken in $4.4 B (AirBnB) or $21.7 B (Uber) have become role models for every aspiring entrepreneur, but is investment really the right metric to define startup success?
It is most important to realize that it really differs from startup to startup as every founder and company has a different path. However one thing is common for all – a huge amount of effort is required for both fundraising or generating revenue – which can divert the founder’s time and attention from the work the startup really demands. Here are a few lessons I have learned from both sides of the fence while raising money and making money.
#1 Lesson: Raising or Making Money Is A Full-time Commitment
It absolutely takes a lot of time to raise money. Setting up meetings, preparing, driving to the meetings and following up on questions and responses can take easily hours out of any day. If any founder is under the impression that you can either fundraise OR run your business on the side while you concentrate on the other tasks, you will quickly find out that it is impossible to do. That is why I realized early that the amount of time you spent on fundraising is the actual metric to measure your success, because the faster you close a round, the earlier you can get back to work and make money. Therefore you must commit to one or the other and put all of your effort, time and intelligence into doing it.
One thing to keep in mind, however, is that if you focus on making money, then that will often lead you to raising money. Which investor wouldn’t want to invest in a startup that has customers and is generating lots of revenue? And if your revenue is enough for growth, then you will have the immense satisfaction of being able to scale the business organically, without the hassle and pressure of venture capital investors. But to find a product market fit and taking care of development and distribution, you will be fully booked with no time for any other tasks, thus always leaving you with the difficult decision of choosing between raising money and making money.
#2 Lesson: Raising Money Does Not Always Mean You Have A Business, But It Is Inevitable If You Want To Grow A Startup
It is very important to realize that if you convince one or more investors to invest in your company, it does not necessarily mean you have a business rather it may mean you have a good hypothesis to potentially reach a market with many customers in the future. If you are in an early stage startup, your idea can all still be very abstract, far from the reality of being implemented and used by millions of customers. And as the number of investors is just a very tiny sample set out of the total population it is not even representative of how an actual customer might respond to your company’s offerings. Therefore it is crucial that you not let fundraising or investments derail you from the passion of finding product market fit necessary to create a real business.
However, if you do have customers, recurring revenue and a product solving a deep pain point, then funding can take your startup to the next level quickly. This is extremely important in today’s competitive markets where speed and scale separate the winners from the losers, specifically in technology where new innovations are copied in no time. Also when your company is about to take off, you will need investments to increase your team size to serve more customers and make your solution more robust and reliable over time.
#3 Lesson: Turning Profitable Initially Does Not Always Mean Your Business Is Scalable, But Shows You Have Some Customers
Over the last years I have seen a couple of startups that turned profitable early but then failed to scale beyond the initial customer base. They often operate with a lean team and deliver high margin products or services. However, profitability can be achieved through various setups as long as you keep the base costs of running the startup low. This may mean a single freelancer who receives upfront payments for his services can also be considered profitable, but his business model and strategy would not necessarily allow him to scale to millions of dollars in revenue. To achieve scale you are ultimately looking for sustainable and repeatable business where you are not purely bonded to one-off sales or headcount.
Therefore, as a profitable company you should be even more paranoid because human beings tend to seek comfort and without the pressure of running out of investment, growth can only be created through continuously pushing the boundaries and questioning your business’ repeatability and scalability.
A Balance Of Raising vs. Making Money To Keep You On Your Toes
Neither raising nor making money defines a startup’s success, but leveraging both in an alternating way guarantees that your startup will never stop growing. Focusing at the beginning on making money and finding customers proves traction, which should be fueled with investments to scale, and then return to increasing your revenues and then raise another round to expand again.
For many entrepreneurs it is hard to know which direction to go when it comes to raising versus actually making money, but if you make sure that you do either one or the other with 100 percent commitment, you can be certain that you will succeed. Also it is important to understand your startup’s stage, market speed and other external threats while managing the internal levers of scalability carefully. Only then will you be able to make sure you do not just focus on raising vs making, but timing each one of them appropriately. Ultimately finding customers who will pay and use whatever it is your business is creating always trumps investments, because once you have paying customers, more investments will follow.