Garrett Camp, the co-founder of Stumbleupon, recommends, “Stay self-funded as long as possible.” I think I have been quoted saying the same thing, but over the past year I have come to realize that you can wait too long to raise outside capital.
When I founded LayerOne I raised money first and then built the company. Since then I have been starting companies using my own money including my latest company – ShopSavvy. Our investment strategy is to look at the company each month and determine if it makes sense to keep investing. While we have the resources to grow the business there is a limit to those resources and I think it might make sense to raise outside capital to increase the pace of growth. Ironically our success in user growth and engagement makes it more difficult to raise money from early stage investors. It is not uncommon to hear a VC suggest that he wishes he talked to us earlier.
We have grown a lot on a small amount of money ($1.7M to date), but sometimes I wonder if it would have been smart to raise outside capital a year ago. Raising outside capital provides credibility to your business giving you instant access to the blogosphere (TechCrunch, VentureBeat and so on) and access to potential employees who pay attention to what deals investors are betting on. Using your own money doesn’t win you any access, credibility or friends.
The upside to not raising outside money? You don’t have to raise money. Tim O’Reilly said, “Money is like gasoline during a road trip. You don’t want to run out of gas on your trip, but you’re not doing a tour of gas stations.” Raising money makes me feel like I am visiting LOTS of gas stations – usually not getting any gas.
If I had it to do all over again I would have raised a small amount of money (perhaps $500-700) from a few smart angels (several asked me to invest and I turned them down) right at the start. These early investors are valuable for a few reasons a) potentially great advice, b) potentially able to refer potential hires, c) potentially able to make referrals to VC firms and (perhaps most importantly) d) social proof that the deal is smart. Within a short period of time, perhaps 6 to 9 months I would have done a $5M series A investment from one tier one firm (perhaps with a co-investment from a strategic). Now we are all in the boat together until it makes sense to raise the huge round or do a strategic deal.
