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Monday, March 25, 2013

The Point Of A Startup Is To Make Money, Not To Raise Money

There is an intriguing new post by Joe Procopio over at WRAL TechWire, provocatively titled “Rating the 'Series A' elite eight of Triangle tech startups”. The piece starts off with some interesting perspectives on the state of technology startups in the Triangle area, reviews some interesting new developments in terms of support for startups, and talks a bit about the availability of funding for startups. Now, if you’ve been around the Triangle for any length of time, you’ve probably heard the old saw that one of the major obstacles to building a startup here is the lack of access to funding. Investors in this area are reputed to be very risk averse and reluctant to invest, especially in early stage startups. So this is a topic that is always of interest to entrepreneurs in the area.

The article also dives into what it will take to attract more attention to the Triangle startup scene and questions whether or not we need more startups here. Joe then proceeds to list off his 8 “elite series A” startups, based on their presumed chances of raising an A round in 2013. All in all, it’s an interesting article that appears at an interesting time for startups in the Triangle. There is some evidence that more funding is becoming available (there are rumors of a new seed stage VC fund being formed), and crowdfunding is becoming an option as the SEC gets around to implementing the requirements of the JOBS ACT.

But... I find myself wondering if we, as a community, are spending too much time obsessing about fund-raising. Whether it’s the Triangle or Silicon Valley, Hacker News or Triangle Tech Talk or WRAL Tech Wire, TechCrunch or Quora, one topic that always seems to be on the lips of startup founders is “venture capital”. We obsess over what’s happening on CrunchBase or AngelList, gossip about who is or isn’t raising right now, who’s investing in who, etc. But is this really healthy?

I consider this kind of thinking, in which people begin to mistake the means (funding) with the end (a profitable company) to be a disease. Call it “FundRaisingItus” if you will. It appears to be an epidemic among entrepreneurs, wantrepreneurs, tech journalists, and others attached to the startup scene.

This danger of this disease, is that it leads entrepreneurs to spend time chasing investors when they could be talking to customers, doing market research, writing code, innovating, and otherwise working on building a company that creates value. Worse, it leads to entrepreneurs doing this when they don’t need to. Not every startup needs to raise outside capital at all, and even those who do don’t necessarily need to do so *right now*. Unfortunately, when we elevate fund-raising to being it’s own end it leads entrepreneurs to, at best, wasting time trying - and failing - to raise money. In an even worse case, they succeed, but raise too early, before they have enough leverage, and so they take really bad deals from investors - the kinds of deals you hear about where the entrepreneur gets “screwed out of his/her company”.

Interestingly enough, Joe himself has written some words on this topic, hitting on a similar theme. In his blog post at

http://exitevent.com/durham-startup-boostsuite-hits-5000-customers-13220.asp

Joe says “In an era where most startup talk is concerned with who is raising how much and from whom, it's so much more rewarding to talk about who is landing customers, proving out their product, and raising recurring revenues.”

And in his N&O article at

http://www.newsobserver.com/2013/01/07/2589196/triangle-startups-follow-national.html

Joe says: “But beyond the basic supply-and-demand issue, there is another trend of entrepreneurs focusing their efforts on revenue rather than investment. It might turn out that some of these startups won’t need additional funds beyond the seed stage”.

I think that’s a pretty good assessment of the situation!

Anyway, don’t get me wrong, I’m not saying that every company should bootstrap / self-fund and avoid outside capital forever. I am saying that we, as a community, should close the Crunchbase tab, and the TechCrunch tab, for a while and quit fixating on fundraising - and focus on creating value and then exchanging that value for dollars. Wait to pursue capital until you A. absolutely must have it to continue or grow, and B. have the maximum amount of leverage possible, in order to get the best possible terms.

Who knows, we may even find that we are able to fund our companies strictly from generated revenue anyway. After all, the point of a startup is not to raise money, but to make money.