This Is The Only Reason Startups Should Raise Venture Capital

It’s definitely the question I get most often: “How do I get the money I need to fund my startup idea?”

And it’s the one I answer the least, because there’s usually something hiding behind that question. When entrepreneurs come to me with that question, experience has taught me that they’re looking for a shortcut to the long, painful, and expensive fundraising process. But there isn’t one.

My thing isn’t about helping entrepreneurs raise money. There are a million different resources, including the venture capital firms themselves, that are better equipped to help a smart entrepreneur figure out how to go about finding money for their startup idea.

My thing is helping entrepreneurs build startups that are better equipped to make money, by generating revenue and realizing profit. Admittedly, I’ve built and sold companies both with and without investor funds. So I’m well versed in doing it both ways. And I can tell you that raising money and making money are two completely different goals.

In fact, raising money isn’t even a goal at all, it’s just the first step on a long journey with no guaranteed outcome. So I’d always rather raise money as a last resort – a path to take only when that path is absolutely necessary and all the other paths are dead ends.

So how do you know when that is?

Like I said, I get the “How do I get the money” question often, about once a week. And it almost always comes with a bunch of reasons why raising any amount – from a few thousand dollars to a few million – would propel the idea into the stratosphere of startup success.

But in every case, and I mean EVERY CASE, you can read between the lines of any given reason and it becomes: “I don’t have access to the money I need to launch the product I want to launch.” 

And when you peel away the layers of that statement, it can be further distilled down to: “I want to build a polished product and the infrastructure to sell it before I know whether or not the product is viable and the market will accept it.”

In other words: “I’d like to gamble with someone else’s money.”

So you’ll forgive me for not walking them down that path.

Every once in a while, I’ll get the better, wiser question: “Should I raise money for my startup?“

And there’s really only one time I’ll answer in the affirmative, and it’s almost always totally unique to the idea, the founder talent, the problem, and the proposed solution. Here it is:

• IF there is a problem that is broad, universal, and painful enough to touch almost every business and/consumer (preferably both), and…
• IF there is an existing solution, and especially an incumbent company, that has lost touch with solving the problem in a technically advanced, cost-efficient, and customer-delighting manner, and…
• IF there are several new entrants into the market of solving that problem an entirely different way, and…
• IF the person asking the question has a solution that is novel, at least a little proven in the real world, and better than both the existing solution and all the new solutions…

Then yes, it’s time to raise money.

Here’s why those requirements matter:

• If the problem is niche, then solving it doesn’t require investor money, because there is a low barrier to entry. Go solve the problem manually first, using your competitive edge to overtake the small-time competition that exists in that small market.
• If there is no existing solution or incumbent, you have an open market. Go start generating revenue with a low-cost solution to prove viability.
• If there is no competition, you need to prove viability of the new solution first, establish a beachhead market, then go raise money.
• If the first three reasons are true and you can’t show quantifiable proof that your solution is markedly better than the rest of the new solutions, no investor is going to stake your solution when they can just as easily stake another, more proven new solution.

Sometimes, the startup game is an arms race, and these are the ventures that are usually the riskiest, but also carry the highest potential reward. That’s what investors are looking for. And those four bullet points are questions of investability – what investors are going to judge your idea, your product, and your company on.

However, that doesn’t mean that if you can’t satisfy those four reasons, your idea is awful. Quite the opposite. Those IFs aren’t gates, they’re opportunities. There are all sorts of ways to turn those opportunities into milestones, even generating revenue and realizing profit along the way.