05/29/2013 12:18 pm ET Updated Jul 29, 2013

Series A Crunch: Don't Get Discouraged

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Much is being said on a daily basis about the Series A crunch. I will give you my thoughts on how to deal with the issue. Please note that this advice is entirely for entrepreneurs, not investors.

First and foremost, decide whether you are a real entrepreneur, or a pseudo entrepreneur.

Real entrepreneurs come to the game with vision, conviction, and an all-consuming desire to build something. They cannot help being entrepreneurs. So financing or not, these are the kinds of people who will figure out how to proceed.

Pseudo entrepreneurs are in the game for a variety of reasons. Money, may be. Perhaps to be cool. They will 'do it' only if someone finances their journey. If money dries up, they will quit, and do something else without material damage to their psyche.

Which of these describes you?

Next, I want you to calibrate how you are spending your time.

What have you been doing for the last six months? Chasing customers? Chasing Investors?

  • Customers = Validation, Revenue, Cash, Valuation, Fundability
  • Investors = Distraction from chasing customers

Now is a good time to reinforce:

  • Entrepreneurship = Customers + Revenues + Profits
  • Financing is optional.

I know, you have heard this from me before! Whom else have you heard it from?

Have you heard it from Omer Artun, CEO of AgilOne, who recently raised Series A from Sequoia Capital with over $20 million in revenue?

How about Andy Chou, co-founder of Coverity, who bootstrapped to $25 million, then raised $23 million in Series A?

While these are classic Silicon Valley entrepreneurs, let me also introduce you to a few from outside the Valley.

Ryan Allis did iContact in North Carolina. He bootstrapped iContact to $1 million, and figured out the most important thing in a business: how to acquire customers. It took him three years to get to $1 million. But once he did, he was able to raise VC money, and scale to $40 million in revenue rapidly. The company was recently acquired by Vocus for $169 million in cash and stock.

And then, of course, there is Aaron Skonnard, who is doing Pluralsight from Utah. There's no way he could have got funding for an early stage, unproven online education company in Utah when he started. But that didn't stop him. He got customers, instead. And he got revenues. Most importantly, he got profits, which made his business sustainable. A few weeks back, Aaron raised a $16 million Series A. Guess what his 2012 revenue level was? $12 milliondollars. Nice, huh?

Now, let's talk mechanics. Do you understand the impact of infusing cash into your business?

Cash comes in multiple forms: Revenues, Equity, Debt, etc.

  • Revenues = Validation, Sustainability, and potentially, also, fundability, although there are other factors involved as well. Revenues also enhance valuation.
  • Equity = Dilution. Good quality equity -- smart money -- can add to valuation, sustainability, and all that good stuff.
  • Debt = You have to service it and pay it back, unless the debt is convertible to equity.

However, in the early stages, the most robust form of cash that you can bring into the company is revenue. Especially because it comes along with customer validation. And yes, customers often advance money if you are solving a real problem.

There may be many reasons why you are being rejected by Series A investors. One of them is what I call the Tyranny of the TAM. Quite likely, you have a fine business in your hand, but the TAM isn't large enough. Doesn't mean you should give up.

My hero on that subject is Sridhar Vembu. Sridhar first build a relatively small-TAM network management software business, without any outside capital. Then, he used that business as a cash cow to bootstrap Zoho, now an over-$100 million SaaS business that competes with, Google, etc.

I have a few other pieces of advice for you as well. One: Don"t obsess with exits. Build a business, instead. And two: Forget freemium for the time being. You don't have a sugar daddy to bankroll it.

If you have questions, please come talk to me at the next free 1M/1M roundtable that I host online, every week, religiously.

I will do my best to help you unlearn your bad habits!