The perception of ample availability of angel and venture funding, particularly in early 2015, led many entrepreneurs to believe that a fund-raise constitutes a great measure for business success. The belief that one fund raise would eventually form the foundation for more investor money in future, though not necessarily misplaced, in many cases has the potential to take the entrepreneur in a direction which may not necessarily be right for the business.
Often the motivations of the investors bringing in the money could be very different from what the founders think is best for the business. Investors, more often than not are looking for scale, primary reason being that future fund raises provide the investors with not just bragging rights but also in some cases an opportunity to exit. All businesses however, are not always ready or even required to scale quickly – I have met founders, for example, that claim that their USP is their back-end technology but they want to raise funds to build a customer facing front-end brand, often because this is what investors have told them to do to be able to achieve scale. Pertinent to note is that such expertise at the back end or even uniqueness of technology may well be used in partnership with larger existing consumer brands in the space to build a very successful business – why go through the risk of building another ‘also-ran’ consumer business where the consumer would not even understand the difference?
This issue may actually be more acute in seed funded start-ups, which try to pivot into more scalable models influenced by investor advice. Recently, a seed funded education company I knew off had to shut shop after trying in vain to transform itself from an education institution FOS sales driven model into a B2C product dependent edu-tech model.
Investor advice although well-meaning, needs to be considered in the context of the problem that the founder is trying to solve. While scale is imperative for investors to participate, if scaling the business means that the business needs to take a completely different direction, then the founders should ask themselves if this was what they had initially bargained for when they started the business… Do they have the skill sets to be able build this new animal and be able to compete with the best over the long term?
Clearly times have changed fairly rapidly – raising money is nowhere as easy as it was say 6-12 months ago. It’s important therefore to think about what’s good for the business, NOT what’s good for the fund raise – both these things could be very distinct, particularly for founders that have business ideas that could be of the more stable or of the ‘lifestyle’ variety.
At times like this, it’s the team that can stay their ground that will eventually be able come out unscathed. Treat a fund-raise therefore just as one part of the entrepreneurial journey, not an end in itself…