It seems, for the last two decades, fund raising for a business (and hiring lots of people) has become an achievement in itself.
Raising funds = sale of a piece of your risky venture in return for cash and rights/options over your freedom (personal & business). It's debt in it's most expensive form: you get contractually locked-in, have to commit future growth, and mega valuation multiples to compensate the high risk. You commit to selling more equity in the future and selling the whole thing at some point.
It's insane! You get shackled and caught in your own venture: your shares become subject to a vesting for years to come, depending on performance and tenure, and you give up some shares in a purportedly bright future.
Plus, everything becomes a tad more complicated and corporate politics sneak into the small business through externals. Investors bring in different expectations and demands which forcibly impact company culture. Rarely for the better.
How is this then entrepreneurial success? Maybe as far as the sale of a share in a loss-making business to outsiders (investors) goes. And even that might come back to bite you when the economy turns against you (*).
In certain business cases, it might make sense to take on initial funds: i.e. in capital intensive businesses (e.g. pharma, manufacturing). Or later, when your business runs profitably, it may make sense to raise debt for expansion and/or investment in your product/service. Being profitable also means, you will then have a lot more attractive options to get cash.
But none of this holds true for SaaS businesses. They hardly need any investment to start selling and shipping to paying customers.
Don't get me wrong: I'm also guilty of following this path myself. I'm by far not immune to doing silly things and following trends. Sure, it's one way of trying to build up a business.
Today, I'd consider a funding round (i.e. giving up equity) a sad day. Nothing for business owners to celebrate much - rather to mourn.
At least, if you stick to basic business logic: make more money than you spend, now and in the long-term.
When it comes to Software/SaaS and most digital businesses, the guideline should be to
Raising funds = sale of a piece of your risky venture in return for cash and rights/options over your freedom (personal & business). It's debt in it's most expensive form: you get contractually locked-in, have to commit future growth, and mega valuation multiples to compensate the high risk. You commit to selling more equity in the future and selling the whole thing at some point.
It's insane! You get shackled and caught in your own venture: your shares become subject to a vesting for years to come, depending on performance and tenure, and you give up some shares in a purportedly bright future.
Plus, everything becomes a tad more complicated and corporate politics sneak into the small business through externals. Investors bring in different expectations and demands which forcibly impact company culture. Rarely for the better.
How is this then entrepreneurial success? Maybe as far as the sale of a share in a loss-making business to outsiders (investors) goes. And even that might come back to bite you when the economy turns against you (*).
In certain business cases, it might make sense to take on initial funds: i.e. in capital intensive businesses (e.g. pharma, manufacturing). Or later, when your business runs profitably, it may make sense to raise debt for expansion and/or investment in your product/service. Being profitable also means, you will then have a lot more attractive options to get cash.
But none of this holds true for SaaS businesses. They hardly need any investment to start selling and shipping to paying customers.
Don't get me wrong: I'm also guilty of following this path myself. I'm by far not immune to doing silly things and following trends. Sure, it's one way of trying to build up a business.
Today, I'd consider a funding round (i.e. giving up equity) a sad day. Nothing for business owners to celebrate much - rather to mourn.
At least, if you stick to basic business logic: make more money than you spend, now and in the long-term.
When it comes to Software/SaaS and most digital businesses, the guideline should be to
- start building, shipping and selling without external investors,
- prove financial viability and sustainability early on (grow with financial frugality in sight),
- Stay in control of organisational culture, and
- maintain maximum personal and business freedom.
Yes, this might mean growing slower for longer. And no, you likely will not make the cover of Wallstreet Journal. Who cares?
Slower growth enables you to shape the organisation you and your team love to work for. Build something that outlasts the rest, and is loved and recommended by customers.
Don't be a firework 🧨 that goes up fast: lots of noise, smoke, and flashing lights that fade before you hear the bang. 🚀
Instead, build that house brick by brick 🧱 on sound foundations. It takes longer and many more people over time, but it is rewarding in many different ways and longer. 🏠
And yes, people can make a good living building houses. 😜
Finally, a house serves warmth and shelter for generations to come 🔥, while a firework 💥... well, you get the picture.
Maxim
PS: Patrick nicely explains in this post how you could find yourself in a pickle, if you raised VC debt in good times, relying on follow-on funding (i.e. not profitable) and the economic tide turns against you.
PS: Patrick nicely explains in this post how you could find yourself in a pickle, if you raised VC debt in good times, relying on follow-on funding (i.e. not profitable) and the economic tide turns against you.