One of the hardest things about building a company is knowing that you are always one fatal mistake away from your excellent idea crashing and burning in a fraction of the time it took to achieve your successes to date.
This is especially true when bootstrapping a company without any outside investment capital to work with. In my opinion, one of the most misunderstood things about entrepreneurship is the celebration of fundraising. Company X raised $5 million and Company Y raised $7 million! It is like a football player doing a touchdown dance before he's gotten into the end-zone. Just because your offense happens to have the ball... it's way too premature to celebrate success.
The investment dollars merely give the founders the ability to have some comfort that for 18 months (generally you aim for 18 months per early stage financing round) there will be cash to continue investing in the business and make payroll. However, the real value of the financing is the ability that it gives you to make decisions with a longer term perspective as opposed to always focusing on the short term (like focusing on New York city office space before trying to expand to 10 cities over night). To continue with the football analogies: if two players are installed as the quarterback on separate teams with similar makeups and one has the faith of the coaching staff and knows he has an entire season to prove himself versus the other, who has a coach that will replace him after the first few mistakes, the former will almost always perform better.
In the startup world, examples of this long-term vs short-term thinking include -
- Perfecting the business model versus chasing short-term revenue
- Giving a project or idea time to cultivate versus pulling the plug too soon
- Not having to worry that if this doesn't go EXACTLY as planned over the next 3 months, what I am going to do for income?
However, in too many instances, receiving an infusion of cash is actually the beginning of the end for quite a few companies. You become less scrappy, less capital conscious. Plus, money often masks inherent issues and problems with the business. An example could be spending $5 in advertising dollars to achieve $1 in revenue growth. "Company X has gone from generating $10,000 a month to over $100,000 a month post funding" is only part of the story. If they are spending over $450,000 a month to generate that revenue, this is a recipe for disaster and obviously unsustainable.
Raising financing should not be the goal of starting a company, however, it is oftentimes a necessary means to an end. The current culture often over celebrates fundraising successes as "milestones" and they simply are not. This has been said by many venture capital firms and angel investors, but not by many entrepreneurs. For TheSquareFoot and me personally, raising financing has been more about the psychological security that the cash brings as well the ability to lay it on the line and not let one mistake hurt you.
Follow Aron Susman on Twitter: www.twitter.com/@thesqft