Three Crucial Questions Before Raising Capital: A Founder’s Guide
As an early-stage fund, we frequently get asked "What should I consider before raising money?" Here are three essential questions we encourage founders to think about before embarking on the fundraising journey.
Do you genuinely need the money?
While it may sound rhetorical, this question goes beyond the obvious need for funds in startup growth. Consider whether money alone will truly solve your problems. Often, startups seek funding to develop more features for their product before finding paying customers. However, you need to validate your product's market fit and identify your target audience first. Before raising funds, ask yourself if the money will go towards building an MVP that has already been validated in the market, addressing a genuine need that customers TRULY need and are willing to pay for. The same way that you need to put the horse before the cart, you need to have a product that your customers want before you raise money.
Who is your true customer?
Your customer is whoever gives you money. If you raise capital, your investor becomes a customer in a sense, paying you money for equity in your business. The needs of investors and end-users may differ. Investors seek returns on their investment, while your customers have specific needs you aim to fulfill. Understand that venture investors often diversify their bets across a portfolio, looking for a few standout companies to deliver substantial returns. This misalignment might arise when you take on traditional VC money too early, potentially causing conflicts between investor interests and the needs of your real customer.
What do you gain and give up by taking on capital?
Founders often view capital as an all-upside proposition without fully considering the downsides. While funds are crucial for growth and scaling, raising capital comes with risks. As mentioned earlier, it can lead to misalignment with your customer's needs and may pressure you to prioritize milestones over understanding market dynamics and developing a thoughtful strategy. One significant sacrifice of accepting outside funding, particularly from venture funds, is that "it sets a clock ticking". Instead of having time to deeply listen to your customers and strategize, you may feel compelled to rush towards hitting milestones to secure the next round of funding. Moreover, taking on capital means you will have to answer to investors, potentially compromising your autonomy and flexibility.
By honestly addressing these three questions, you can make well-informed decisions regarding fundraising and chart a more sustainable and aligned path for your startup's success. We like to discuss all these three questions with entrepreneurs and friends who ask for advice. What other questions do you think are important?
Allison and Maria
