The Risks of Raising VC Too Soon
Written by Dave Bailey
Are you considering raising venture capital? Here's some of the risks involved with raising a round of VC money too soon, and how to avoid them.
I’ve managed to raise investment from a PowerPoint presentation twice over the last 10 years. Starting off with money in the bank sounds like a great idea — but it turns out that it’s not that simple.
The cost of investment goes beyond equity dilution. Raising capital changes your mindset, often in unhelpful ways. Here’s why I’d never raise outside capital at the idea stage ever again.
1. Investor discussions lock down bad assumptions.
As you pitch an early-stage idea, investors probe into your business assumptions. Over time, a consensus naturally forms around the most ‘investable’ assumptions. When the investor finally says ‘yes’, it feels like a form of market validation. As the focus turns to planning, the latest set of bad assumptions are locked down . . . and they’ll come back to haunt you later.
2. Hiring people puts a layer between you and ‘the front line’.
When you’re building an idea, hundreds of tiny decisions need to be made. Raising money allows you to recruit other people to take some of those decisions for you. However, every designer, developer, marketer, and salesperson you hire takes you one step further away from your customers and technology. This creates a communication overhead that’s hard to manage — especially at the idea stage, when the learning curve is steepest.
3. Raising capital is an excuse for not skilling up.
Every successful founding team I know has had to painfully learn the basic skills needed to build their ideas themselves. This includes how to design, develop and sell their idea, and a need to raise money early is often due to a lack of these skills.
I’d always suggest looking for ways to fill the gaps that don’t require funding. For example, look at recruiting, creating partnerships, or — my personal favourite — learning new skills yourself.
4. Early money encourages ‘over-building’.
To quote product development guru Marty Cagan, ‘The really good teams assume that at least three-quarters of the ideas won’t perform like we hope.’ The scope of ‘minimal viable product’ tends to increase proportionally with the amount of money available. All too often, funded teams overcomplicate their products just because they can.
5. Investors sound more helpful than they really are.
Don’t get me wrong — I’m a huge believer in connecting with, and taking advice from, people who understand startups. However, forming a solid board of voluntary advisors can be equally as helpful, without needing to raise any money at all.
6. Investment requires you to ‘go all in’.
Raising money might sound like a less risky way to leave your job and focus full-time on your idea. However, given the low chance of success of any new project, it’s worth working on it at night, on holidays, or over weekends before putting all your chips on the table.
7. Setting bad legal precedents will hurt you later.
At the idea stage, you have virtually no negotiating power. Yet the first round of funding is where many important terms are agreed, which form the basis of every future round of funding. Agreeing to the wrong terms can prevent you from raising professional investment further down the road.
8. You begin a never-ending addiction.
I constantly meet funded founders who are looking to raise more money, to start selling, marketing or shipping their products. It becomes a constant excuse for putting off the most important things that they should be doing today.
This is the dark side of raising money: it consumes you. The easier it is to raise money at the earliest stage, the more it takes hold of you. That’s how they get you!
So what should you do if you have a business idea?
Maybe you’ve read this and thought, ‘But my case is different.’ While I can’t slap you out of it, I can offer you some real alternatives to raising money:
- Learn a skill. Over the last 10 years, I’ve taught myself how to write good copy, how to manage products, how to code, how to design, how to write articles, how to recruit people, how to build a following, and anything else I’ve needed to get to the next level. Skills are your leverage at the early stage, not money.
- Simplify your idea. It’s time to get creative. Can you serve customers manually at the beginning? Can you use SMS and email instead of creating an expensive mobile app? When you take the possibility of money off the table, you’ll be surprised by how much you can simplify things to get going.
- Focus on ‘ramen-profitability’. You need to think small before you can think big. Set your first goal as making just enough money to live on. Maybe this is £2000 a month. Figure out how many customers you need to achieve this and how you can make it happen.
When you’re ready for funding
Funding is appropriate for products that have some traction in a large market.For the 99 percent of companies that don’t fit this bill, external capital can be a recipe for disaster. If you’re at the invention stage, remember that the mother of invention is necessity, not money.
Continue reading about startup funding:
- Looking for funding for your startup? Explore our tried and tested fundraising strategies to get you started.
- Struggling to write a good pitch? Read up on how to write the perfect pitch and turn prospects into paying clients.
- Developing a product? Learn how to come up with exciting and innovative product ideas.
Originally published Mar 7, 2019, last updated Aug 19, 2021
About Dave Bailey
Hi, I’m Dave Bailey and I coach tech CEOs from Series A to pre-IPO. Join 20,000 entrepreneurs who receive my new essay every week.
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