Should your startup fundraise from investors?

Tl;dr: This is an intro to question of whether you as a founder should consider raising money from investors. It is for new founders. 

You have read about startups raising a lot of money and it seems glamorous to you. You want to be in the club.

Let me save you some time. I was once you.

Stop and check yourself.

Fundraising sucks. Read Is fundraising easy? No. Fundraising is brutal first.

I’m going to explain the impact of fundraising to you briefly.

Difference between a company and a startup

Anyone who starts a company is an entrepreneur.  Hell, even your 16-year-old that sells sneakers and doesn’t disclose income could call themself a founder of their hustle.

A company is that barbershop that you set up on 4th and pretending I know NYC enough to pick a place. No disrespect to you, good for you! You’re taking a risk. The thing is you’ll likely stay in one location and your kid will resent you forcing him to take it over when he wants to “find himself”. l

A startup is a different animal. It’s a business model designed to grow fast, and for our purposes, to raise money.

Here is a quote from TechCrunch about software for barbershops which is a “startup”:

Squire, a startup that sells software to barbershops, has raised $59 million in a round led by Iconiq Capital. The raise is $45 million in equity capital, and $15 million in debt financing.

The round comes just months after Squire closed its $34 million Series B, led by CRV. With the new financing, Squire has nearly tripled its valuation, up from $85 million in June to $250 million today. Other investors in the company include Tiger Global and Trinity Ventures.

What happened? Squire’s revenue went from zero in March, when all barber shops closed, to between $10 million to $20 million in ARR just 10 months later, TechCrunch has learned. The growth indicates how the next wave of barbershops will be built atop digital technology, instead of offline processes.

“We just took off like a lightning bolt,” co-founder Dave Salvant tells TechCrunch.

Salvant and Squire’s other co-founder, Songe LaRon, began the business in 2016 as a back-end barbershop management tool for independent businesses. Squire lets businesses schedule appointments, offer loyalty programs and install contactless and cashless payment. The team claims that barbershop operations are more complex than many other types of small businesses because there are multiple parties transacting, plus customers might check out different services from different barbers all within one service.

See when you’re a “startup” that sells scalable software you can still grow a lot whilst “all barbershops closed”. That’s illogical but you get my point?

Investors love startups for growth

If you could invest in your local barbershop, or the software that powers them all and can grow fast at low cost, what would you throw your cash at?

If you are a traditional entrepreneur, understand the difference so it doesn’t frustrate you.

You are not a loser for starting a real business, you just aren’t sexy to investors for what I hope are obvious reasons given alternative opportunities.

Entrepreneurs think money is the solution

I’ve been poor, so trust me, I know what is like when you have aspirations and can’t even afford to take that Miss World candidate on a date to the park for ice cream for 2 Euro. No joke, in uni that happened to me. I couldn’t even afford bread to eat that week… Firas and I spent the money having beers at the club that night.

It’s been important for me to never be broke and not just for social reasons.

When it comes to business though a certain amount helps, beyond that, it harms you.

It’s like Maslow’s hierarchy of needs. Once the physical and safety needs are dealt with though, it can hurt you since money isn’t free.

Don’t believe me? Ask anyone without a knee cap that couldn’t get a bank loan and ended up at a shylock that charged them 20% vig.

What I’m teaching you won’t result in sledgehammers, but it could involve you losing your company and being fired.

What money can do for you?

Money helps you do more of things. So long you know what specific things those are, great. The issue is most people don’t know.

You have a barbershop with 4 seats. You only have the cash to cover two seats as cash flow is poor for now after fitting out the shop. You have 4 customers waiting at any time and half leave every 5 minutes.

You are losing out on 2 cuts.

Clearly, some cash flow to hire 2 more barbers makes sense.

Dre shouts out to you on your local Detroit radio and suddenly you have a demand for fades you can’t handle. You keep hearing “you should open another location!” and you really should. Money can help you set up another location to capture demand.

You then set up two more locations and operations become an issue. Some money to hire an accountant and consultant would really free you up. This helps you process more clients. You see the payback immediately.

Gretta being a moronic teenager starts a new trend called “don’t cur your hair, save the environment” whilst on a private plane to Davos. Suddenly your customers disappear. You expanded and you have your costs to pay. What now?

Money can’t help you now.

What money doesn’t do for you

Mom thinks you are special. No one else does.

You come up with the bright idea to cut hair with blunt and vintage spoons. It’s hipster like, that’s so hot now? The issue is you are someone infecting everyone with diphtheria. You have a legal case against you.

Who cares, let’s grow you say, Miss Holmes.

You raise money and expand your locations. You source more nasty ass spoons at a huge cost. The lawsuits mount.

Whatever you were doing didn’t work. The money just made the problem larger. Your legal bill matches Purdue.

Stupid is as stupid does and more money makes more stupid does.

The quid pro quo of investor money

When you raise money from legal sources there is no recourse (in VC land).  You burn the money and you burn your relationships and reputation, not your house.

However, VC investor money is super expensive, and as you figuratively sell a portion of your house (startup), at a certain point investors own your house and can kick you out.

Every time an investor gives you money they take around 20%.

Let’s say you want to make $10m. If you raise no money and you sell for $10m, you get 100% which is $10m.

If you raise 5 times you might own 10%. So the same $100m exit gives you $10m.

To get the same outcome you need to sell for $1b owning 10% which is really hard!

If you can’t do the math, that sucks. But let me explain more about suckyness.

You took the risk to start your company to be your own man/woman. When you raise money, these investors progressively take more control and become your boss.

You have to report to them. You have to ask for permission for big decisions.

I’m being serious.

Is the juice worth the squeeze?

If you raise from someone called “Jimmy the knife” you know for sure it’s not a great idea, but you still decide to do it because you “got this”.

Raising from VC investors is normally a choice, but one you need to take seriously. Most founders think because they wear Patagonia the money is no less dangerous.

I love this movie about a nerd who dates a former porn star that wants to be a normal girl and go to prom. Her pimp beats the sharlze out of the high-school kid and tells him that the juice needs to be worth the squeeze.

Of course, she is. He tells him so at the end of the movie.

If you want to raise money, you need to have the same certainty.

Bootstrapping can make you rich but not famous

Bootstrapping isn’t talked about enough so I always want to raise awareness.

Owning your company 100% is flarking sexy!

Would you rather be rich, or poor and famous?

Well, if you were broke and Mc Hammer, I’d bet on the money.

Startups who get funded by famous VCs might get some PR to stroke their ego, but founders with their head down doing real business will end up wealthy.

ONLY raise money if the juice is worth the squeeze.

I have a lot more detailed blogs for you to learn from. This is an attempt to try make the topic of fundraising anyone can understand.