When I was seeking a co-founder for my startup, each time I’d dive deep into a discussion about commitment with potential partners, they’d bring up venture capitalists and fundraising. An early question among potential co-founders during these discussions was always “have you raised money yet?” as if it’s a requirement of doing a tech startup.
It seems like a common trend with first-time tech entrepreneurs—and even some more experienced entrepreneurs—to think of fundraising as a required step in the process of starting a technology company. They read articles on TechCrunch about how startups are raising huge, early rounds of funding from VCs, then begin putting together pitch decks and attempt to seek out funding for their own startup.
However, if you look at the history of today’s biggest tech companies, nearly all of them started without raising outside funds. Facebook, Apple, and Microsoft all started in garages or dorms, and didn’t raise money until later on when they were ready to scale up operations. In fact, many companies are successful without ever raising outside money, including PlentyofFish, Balsamiq Mockups, and Shutterstock.
Here are some reasons you should skip the VC money and just start building your business.
You probably don’t need it (yet)
Raising money is all about enabling scalability (i.e. enabling you to expand on an already working business model), and if you’re in the extremely early stages of building your company, you still need to develop your product.
Product development should be done by the founding team, and doing this without outside funding—surviving on a tight budget and working under extreme amounts of pressure—is a good test for how passionate your team is about the business, and how well they work together.
Additionally, startup costs for technology companies are extremely low. For my startup that offers music for business, Amazon Web Services only costs $25/month for web hosting and storage, various freelance services are costing around $100/month, and technology development and marketing (mostly SEO) is done for free by us.
When it comes to customer acquisition, there are many free marketing strategies you can use such as SEO, social media, and email marketing.
SEO has worked extremely well for us. Almost all of our leads come from Google, either directly to our landing page or through our blog. Become a great writer, create a blog that contains content your target customers may be searching for, and check out websites like Backlinko and QuickSprout to learn all you can about getting your content to rank on Google.
When it comes to product development and marketing in the early stages of your tech startup, funding is optional. By doing these things without outside funding, the mistakes you make won’t be as expensive.
Your time is better used elsewhere
Raising money takes a lot of time. It’s estimated that for experienced entrepreneurs, it can take up to three months of full-time work. For inexperienced entrepreneurs, this can be much longer.
That three months could be better spent building your product rather than attempting to talk to VCs. Even after you release your product, it’s likely that you’ll need to make a number of iterations before you find product/market fit. This is going to be a much more valuable investment of your time than fundraising, and can help you determine early on if you have a viable business model.
If you’re able to build a product and find product/market fit without raising money, you can maintain control of your venture and grow from the resulting revenue. Generating recurring revenues in exchange for using your product is much more valuable to you and your business than trading a percentage of your company for one lump sum of cash.
Build and release your product, get users, and figure out what makes them tick. I was able to learn programming and submit my app to the app store in three months without any outside funding, and I’m now in a much better position to raise money because I have some user data to work off of to present a working business model.
You’ll get a low valuation
When investors evaluate investment opportunities, they don’t think in terms of if they should or shouldn’t invest in a specific startup; they think about which of the available options they should invest in. Investors want to invest all of the money they have to maximize their returns—it’s just a matter of where exactly it’s going to go.
Put yourself in the shoes of an investor. If you have $1 million to invest in new companies, are you going to throw the money at a startup with no product, no traction, and a team new to entrepreneurship, or are you going to put your money into a proven team and concept?
Most investors choose the latter, and if they do choose to invest in a newer company or team, they typically want more in return. If they normally take 20 percent equity for a proven team and concept, they may ask for upwards of 40 percent of the company for a similar round that has an unproven concept and team.
If you’re a newer entrepreneur or your business concept isn’t yet proven, find a way to execute your idea on a small scale to prove that your business model will work and that you’re able to effectively execute. Then, go raise money when you’re ready to scale up something that’s already working.
You don’t know how you’ll use the money yet
If you’re extremely early in the business with no product, no employees, and no revenue, your financial projections are going to be more wrong than you think. You’re going to find yourself forecasting revenues and expenses based on costs and revenues of similar established businesses, rather than your own financial history.
The problem with using numbers from similar businesses is that these companies have already scaled up operations and figured out exactly how to execute their marketing strategies, so their expenses and revenues—such as customer acquisition costs, customer lifetime value, and average revenues per customer—likely won’t apply to you at this stage of your startup.
A business at scale may have a customer acquisition cost of $35, but this is averaged across all of their marketing channels. In the early stages of your startup, you’re likely going to focus on a few, highly optimized marketing channels.
In a startup, figuring out your marketing channels and who you’ll need to hire is going to take some time. Early on, Dropbox thought their main marketing channel would be Google Adwords, but after spending between $233 and $388 to acquire a single customer for a $99 product, they learned that ads wouldn’t work for them, and soon developed their referral system.
VCs want to know why you’re raising the amount you ask for, and where it’s going to be spent. When you have no product, no customers, and no proven marketing channels, it’s hard to estimate the costs of running your business.
Instead of coming up with a business idea, putting together a pitch deck, and trying to raise money, just get started on your business idea.
Build it, launch, get users, and iterate quickly based on early feedback. If you can prove users are willing to pay for your product and you’ve figured out an effective marketing channel for getting more customers, you’re in a much better position to approach VCs.