In Silicon Valley, raising capital is a badge of honor and a mark of success. It’s the West Coast equivalent of a performance bonus on Wall Street
And while it’s inspiring to see founders acquiring the resources to achieve their business dreams, the fundraising culture is also superficial in many ways. It’s seen as an end in itself instead of a means to end.
Furthermore, the funding environment is shifting, and many founders are oblivious as to how this affects their business.
I believe that both of these shortcomings are because founders are unable to take a step back and see the big picture on fundraising and the growth of their businesses.
Simply put, venture capitalists invest in startups in the present to lay claim to the company’s earnings in the future. Founders take startup money because they have a business that they believe will be more profitable at scale, but don’t have the money to get there. The implicit agreement is that both parties believe that the business will be profitable and more valuable when it is bigger.
Raising money is as much an act of humility as it is pride. As a CEO, getting funded is a recognition that your business might be successful in the future, but that in present form you are lacking the resources to get to that point. Taking money is accepting that you need help from people who have more than you.
It’s also an acknowledgement that you have intense work ahead of you. VC’s and angels give you the resources because they think you might be successful. But they also expect you to do everything in your power to achieve results. You don’t need to be profitable yet, but you need to grow so that you can be profitable in the future.
This explains why Silicon Valley is so growth-obsessive. Future earnings is the name of the game for startups, and since most startups aren’t profitable in their current size, the strategy is to increase the size of the business to become profitable at scale.
Growth is generally not free. If it were free, no one would need to take outside money because you could just grow on your own and keep the profits. Sales, marketing, and advertising are all strategies where you connect to paying customers and generate sales. They are critical element in scaling your business.
There are ways to reach customers for very little, of course, but they are unpredictable and flaky. There is such thing as the occasional free lunch, but it’s unreliable and not an effective way to scale in the long term. If you can make something go viral, that’s fantastic. However, this should be seen as an added bonus and not as a strategy you can easily replicate.
Even from the perspective of selling through cold email outreach, growth is far more effective when you invest in lead generation and other tools to support your team.
You could bootstrap (AKA build a business without funding) if you are profitable early on and can re-invest your resources into marketing. Many lifestyle business work this way. However, if your aspiration is to scale- and many business are only profitable at scale- you’ll need an outside source of cash.
Thus, the money you raise is an essential resource to build scale. Assuming you have some degree of product market fit, you can use your marketing spend to generate new sales.
The progression of growth, funding, growth, funding, and so on is typical because the two are intricately related. There’s a general chicken and the egg problem for startups: you need funding to achieve growth, but at the same time, most times you need growth to gain funding. Investors don’t like to invest without a track record of growth, because there is a higher risk that the end goal- scale with profit- will not be achieved.
The venture funding environment has shifted in the past year, with total Series A dollars invested decreasing by as much as 33% over a one year period. Recognizing the relationship between your growth and fundraising, how does this affect your business decisions and fundamental strategies?
The drought in funding does not indicate a “bubble” or a decrease in liquidity in tech. It means really only one thing: investors are being more cautious with their investments. They are looking for more track record of success and less risk in the companies where they deposit their dollars. In other words, investors need to see evidence of growth and a path to profitability.
From a company standpoint, this means that you need to double down on your marketing and focus on growing your revenue. It also means that you need to think closely about quantifying your return and ensuring that your marketing and sales team is generating the numbers that you need. A strong marketing ROI is an essential metric of success.
Too often, fundraising and marketing are seen in isolation. If you view marketing as a “nice to have,” then there’s no need to invest much in it, and you can hire mediocre talent to run your growth. But if you recognize that marketing is the linchpin in raising money and scaling your company, then you’ll take it far more seriously.
Many growth marketers have tunnel vision and obsess over the details of their respective digital channel. This is a mistake and a sign of weakness. The best marketers think like business strategists, and have a high-level holistic view of how to drive your campaigns and the whole business forward.
The top marketers see your business an expansive network, with many participants and stakeholders. Observing your business from a bird’s eye view, they can improve your strengths and reduce your funnel leaks, leading to a steady increase in your return on marketing spend.
Raising money and growing your startup can seem absurdly complicated, but at their essence, they are both predicated on a powerful belief in your product or service, and the desire to help the right group of people. Form your goals around fundamentals, and you’ll be well on your way to startup success.