
Startups shouldn't raise money - rheotron
https://ensorial.com/2020/dont-raise-money/
======
timavr
Founders always have skin in the game. It is called their time. Their lifetime
is a very finite resource.

In reality, very few founders just raise straight away. 99% of founders spend
a significant amount of time working on their business before they see the
first dollar from the investor.

Operating business with capital constraints most of the time actually leads to
way worse decisions. You start working with people who are less qualified
because either they are volunteers or they are the only people you can afford.
You start taking worse terms with customers because you need this money to
survive the next few months or make the next payroll. You start taking credit
card debt just to give you a few months in the hope of closing the client. You
put your house as collateral to and pay social/mental costs if things don't
work out.

So please please please if you have the opportunity to raise money on standard
terms, just do it, unless you have rich uncle/family or wealthy yourself.

Also, people need to stop treating money in a startup financing transaction as
a more honorable side of the deal. When you buy tomatoes in a store, you don't
go to the store owner and be like "Yo, I gave you money, respect". Startup
investors give money for shares in a business. One part of the deal is exactly
as valuable as another.

~~~
godzillabrennus
Not all investors are created equal.

Taking their money might mean having to listen to them.

Nothing like fun and games introduced by a bad investor to make an already
stressful situation more stressful.

Don’t build a business reliant on investment and you’ll be happier.

If you have to raise then don’t treat it as a good thing, you just sold part
of your company and have more bosses now than just clients.

Standard terms hardly exist. Every deal is different.

Venture capital is a business model, Take the time to understand it before you
start raising from VC’s.

There is nothing wrong with making a nice lifestyle salary from a small SaaS
business without the pain of investors.

There is also nothing wrong with spending other people’s money gambling you
can build a big company. Just don't let the terms prevent you from paying
yourself if you go that route.

~~~
burntoutfire
> Taking their money might mean having to listen to them.

How is that structured legally? I doubt they get a majority's vote, so how
else can they influence the decisions? Is not all investment money unlocked
upfront?

~~~
jimaek
My contract had things like "investors majority" and supervisory board with
lots of power where I only had 1 vote.

Those 2 things together could force me to do almost anything if they really
wanted.

It's all in the details.

~~~
barnabee
Yeah, those details matter.

I could definitely get behind “Startups shouldn’t raise money on terms that
destroy their autonomy and self determination”

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barnabee
This post is either written by someone with no skin in the game when it comes
to the advice they’re giving (despite appearing to have swallowed a couple of
Taleb books but retained little, oh the pointless irony) or who is massively
overgeneralising a subset of reality that worked for them.

Please don’t follow their advice.

> The alternative is to forgo raising money and creating a sustainable
> business from the beginning, growing linearly with the number of people that
> give you money for your product.

This works only for insanely wealthy founders or trivially simple to implement
businesses (and even then you’re going to need to be way richer than average).
One of the great things about the rise in startups, accelerators, and VCs is
that starting companies has become a career option for far more of the
population.

The rest of the argument just degenerates from there:

No skin in the game: try telling that to a founder who’s taken a 50–80% pay
cut and probably started off working for free to get their company funded, but
who owns big chunk of the equity and can pay themselves properly if they get
to product market fit and hit a growth curve.

Ruthless execution, faster path to growth etc. Nonsense! I’ve come across
plenty of small startups or individual founders that carried on far too long
after they should have admitted failure because of the sunk cost fallacy. Team
keeps taking sacrifices - cut all costs, less pay, work for equity, etc. But
while you’re small enough you can do this nearly indefinitely. Taking funding
forces you to aim for something bigger and you’re either going to win, close
down, pivot, or get acquired. Sure you can keep raising while there’s a
probability of a big enough success at the end but the size of the potential
and burden of evidence goes up with every new round and every increased
valuation.

------
manquer
This sounds like it is written by someone who has never started up a company
or run a small business or a even lemonade stand in their life . This is
equivalent to saying banks shouldn’t lend money to small businesses ,
businesses need money to survive, the guy having the money and one ready to
work it are almost always not the same . it could be VC, the bank or your mom
giving you the financing to start that lemonade stand.

Even if the assumption that founders put zero money of their own is true (as
others have pointed out it is not, in vast majority of the cases) founders
have enormous opportunity, emotional cost, lost salary and the financial
hardship.

~~~
MattGaiser
It completely ignores everything from inventory to cash management from
invoices being paid late.

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MattGaiser
> The alternative is to forgo raising money and creating a sustainable
> business from the beginning, growing linearly with the number of people that
> give you money for your product.

Assuming that it doesn't require money to build, which is dubious in many
cases, but alright.

> Not only that, but because you don’t have the safety net of a pool of money,
> you are forced to find the fastest path to sustainable growth.

Sustainable growth? Or just the fastest path to growth at any non-monetary
cost so you can make the next payroll? Sure it might be cash sustainable
growth but could be unsustainable in other ways such as making ever higher
promises to keep customers buying more, allowing all sorts of unscrupulous
purchases of user data, or shipping software without any modicum of security.

> You now have no choice but to be ruthlessly focused on the things that
> impact your bottom line (i.e. pay the bills)

Or you end up cutting corners and compromising on the product just to get some
cash in the door. A lot of ethical red lines become maybes when the bank
account declines. I have a lot of friends in the startup space and they have
amazing stories of suddenly cash short companies burning up their reputation
just to get the next sale.

Crises don't lead to clearer decision making. A constant threat doesn't lead
to clearer decision making. It leads to shorter-term thinking.
[https://journals.sagepub.com/doi/10.1177/0146167299025001006](https://journals.sagepub.com/doi/10.1177/0146167299025001006)

Would you do a better job for your company if they kept you one paycheck away
from eviction? Or would you play politics, become a sycophant, hide errors you
made, and be heavily focused on just making it to the next week no matter the
cost?

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chester_r
Sure, VC funding can delay the inevitable for businesses that were never meant
to be, but what if 10% of the time, it gives the right person the right
breathing room to create something truly great? Incessant pressure to survive
isn't always the best environment for creative work.

Most startups won't know a priori which of these categories they belong to --
that's the job of VC. So I'm not sure if "don't raise money" is always the
right advice.

------
hamsterbooster0
The author seems to forget that not all startup can be sustained by customer
revenue in the first few years (i.e. biotech or self driving car industry)
Even very successful companies like google or snap wouldn’t be able to thrive
without funding at the start.

~~~
ralphstodomingo
Pretty controversial of me to believe so, but what if those sectors aren't
really for startups? I'd wager they're more accessible to well-established
companies belonging in a horizontal industry beside those.

~~~
vulcan01
Then we wouldn't have Rivian, for example. Competition can be good.

------
tmlee
Not raising or defer raising money can help establish the foundations of a
viable long term business.

To start with, it does not feel right to have to raise money or give away
equity in order to build the first MVP to look for product market fit.

Founding team should have all the skillsets required to launch the first
version of the product (Tech + Marketing minimum). Tech founder who is able to
code the product and has the know how to keep it running for as cheap as
possible, and another founder who knows how to bring the product to market.

Iterate from there, and if lucky eventually slowly have a sustainable
business. Along the journey, not having VC money trains the founders to make
difficult choices and learn things the hard way. Ie. Founding team will do as
much as they can before hiring someone else, optimize cost of operations
rather than throwing money easily at problems, etc.

Founders who are in it for the long game and want to build a sustainable
business, will find not raising money most attractive.

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TAForObvReasons
> By raising money ... You can now pay your employees a salary

This author possibly lost "contact with the earth". Especially early on, most
people will not join and work for free (or on the sole promise of equity down
the road). Not all startups are simple CRUD apps, many require significant R&D
or marketing investment upfront.

~~~
manquer
Do not dismiss any product CRUD app or not so lightly .

Building and selling any product ,getting an user base is very difficult.
Attracting people to work in your product is even more challenging as it is
not cool. Getting all of them working as an organization is no less difficult
just because tech does not involve fancy R&D

------
TrackerFF
It is absolutely possible to start a business without any serious loans, or at
the least with "normal" business loans which do not involve any ownership.
Hundreds of thousands of small and medium-sized businesses do this, and have
done it for decades.

But the are some severe limitations:

1) You may not scale as fast as you'd want to

2) You may be competing against businesses that ARE funded, and can undercut
you

3) The setup period may be very long. If you're gonna fund it all yourself,
that may take year and year of saving money. This if obviously a huge problem
if you've discovered a niche with lots of potential RIGHT NOW.

The biggest difference between a typical startup business, vs "classic" type
of business, is the speed and scale.

(With that said, I don't think the race to bottom by funding/VC arms-race is a
good thing.)

------
DylanBohlender
Like all things we deal with in our profession, the choice to raise money is a
tradeoff to be evaluated, not something inherently good or bad.

The cons of raising VC money? You are forced to answer to someone else to some
extent. You become vulnerable to complacency and largesse for the reasons
stated in the article. You put some distance between yourself and customers
early, which can slow down your quest for product-market fit. You lose a piece
of the equity pie.

The pros of raising VC money? A good investor can give you market knowledge
you would have to learn the hard way otherwise. A war chest can give you a
head start over other early-stage competitors (or establish you as legitimate
among existing ones). You can take on problems that require large up-front
investments. You can hire people to help you out without having to worry about
your ability to pay them.

Personally? I found the tradeoff to be worth it and raised money for my
current company. We worked for about 8 months without paying ourselves, and
then started paying ourselves half our market rates once we had some
supplementary cash in the bank. We hired a few stellar employees who knew how
to do the things we needed to do but couldn’t, and now I think we’re in a much
better spot than we would have been had we not raised.

But obviously it depends on the situation - just because it’s worked for us
doesn’t mean it will for others. Happy to answer further questions about our
founder rationale for anyone who’s interested.

------
jl2718
The pattern that I see is startups succeeding on money alone. Ideas and
execution that would never be sustainable turns into the next big thing
because so many people are invested in it, and everybody is pumping hard to
find the greater fool.

If a VC sees a good business with great execution that doesn’t need their
money, they’ll rush out immediately to find a competitor that does. If an
investor is sitting on a good business, they want to keep it quiet and hold
their shares privately. If it’s a toxic money pit, push it onto the LPs and
then get them to help you pump and raise.

The cost of big-money capital is so cheap now that it inverts the incentive
for business discipline. The more you lose, the more you raise, the bigger the
valuation.

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_alex_
I worked at a startup that took waaaay too much money too early. they hired a
ton of people that they didn’t need and refused to make some hard decisions
because they thought they had all the time they needed to “figure it out”.
That company is still around but they’re probably going to collapse. they’re
almost out of money and don’t actually have a thing that people want to buy.
all they’ve done is spend a lot of vc money.

That said, I don’t think you want to swing the pendulum the other way and
everyone should bootstrap everything. Hiring good people takes money. I think
you should raise the amount of money you actually need and no more. Scarcity
drives the hard decisions.

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jariel
Step 1 - have some very basic thing that provides some essential value, Step 2
- scale quickly and dominate the market, Step 3 - settle into viability.

Capital deployed effectively is effective that it can be distracting is one of
the risks. Also, in growth phase, usually growth and getting to mass-market is
more important than sustainability. If you're the new Twitter, you want to get
to 500M users or whatever as quickly as you can.

~~~
ackbar03
I feel like it's more important for step 3 to come before step 2 now, although
I understand this will not be possible for some business models. But that
being said, in most of such cases it's actually questionable whether these
business models should exist in the first place and are a good use of capital
since so few of them workout

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carlsborg
Depends how much capital you have, and how profitable you are early on.

For most, its a harder path without. Growing fast with organic income leaves
little room for risks (strategic/operational/extrinsic) and competitors with
capital can outspend you.

Delivering a world beating service/product on a shoestring budget while
spending on growth is even harder. Kudos to those that did this (Browserstack,
Atlassian etc).

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seek3r00
The problem I see with raising money is that, practically, you’re giving away
your business a piece at a time.

Sure, by raising money you’re going to grow your business more easily, but
you’ve also compromised your ownership of it.

Obviously, if all you think about is cashing out after the company’s IPO,
raising money makes sense. Especially, if you don’t have a sustainable
business in the first place, and you’re losing money.

~~~
cannaceo
Businesses need capital for a variety of reasons. CapEx, money to buy growth
where CLTV>CAC but CAC is still a big number, or maybe your competitor just
raised a 30MM and you don’t want to get crushed when they operate at a loss to
drive out smaller players, maybe you need to hire a sales team, etc.

It’s not a personal decision to raise or not. It’s dictated by the competition
you’re facing.

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npiit
While I truly understand the point the author makes, I cannot accept that all
founders are the wanna get rich type who think that raising money equals a
successful company. I think he's biased by the history of the easy money era
of the post 2008 recession to pre Coronavirus. I think now things are going to
be different and raising money will not be as easy as it was in the 2010s.

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sys_64738
So many companies see funding as a replacement for actual revenue. These
companies are doomed to fail and deserve to. If you look at their founders
then this is their existence. They live off of the funding for a few years
until the funding runs out then move to the next idea. It’s the modern day
snake oil spoon fed to investors.

~~~
jl2718
Except that the big winners are exactly these people. E.g. in the peer-to-peer
space, we have companies that have huge revenues from ridiculously simple
applications, near-zero marginal operational cost, and still find ways to lose
money. Yet this is who we lionize and reward with $100B valuations. Trust me,
there were lots of rational technical founders working on exactly the same
idea without venture capital funding for years before.

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alexheikel
We were lucky enough to not be able to raise money every time we wanted.

That made us improve every action and work harder on every situation so we can
have a better connection with what we are building.

So, money is something that we always think that could help, but sometimes you
can only find secrets without it.

Raise or not to raise. That's the question.

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mrtksn
Unless of course, your startup has a higher barrier of entry than the
resources you have in hand.

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aruanavekar
Short, concise and immensely thoughtful. ️

