July 30, 2014

When should you raise money?

Earlier this week I was on a panel at MobCon with Michael Gorman (managing partner at Split Rock Partners) called, “Investing in Mobile Companies” and one of the early questions was about WHEN an entrepreneur should raise outside capital. Michael put me on the spot and asked my opinion. To be honest, I have had a bias against raising outside capital since I raised my first $11M when I was in my twenties. The process was time consuming, frustrating and ultimately heartbreaking. In the case of my lastest startup, ShopSavvy, we waited WAY too long to raise outside money (three full years from the start). We starved the company until last year. I decided to answer the question based on my current bias.

If you are starting a high-growth company today, it is my opinion that you should raise capital as soon as possible even if you don’t actually need the money. Why? I believe you need the social proof outside funding provides. In the case of ShopSavvy we kept getting download volume that seemed to give us the social proof we thought we needed, but the reality was without the capital the social proof would have helped us get we were really squandering the opportunity we had. We needed three or four times the staff we were able to field on our own – outside money combined with our traction would have ensured we exploited the opportunity that was in front of us.

If (and when) I start my next deal you can bet that I will participate in an early stage accelerator like TechStars, Y Combinator or 500 Startups. After I get my inexpensive ‘social proof’ from an accelerator I will immediately raise a small angel round (likely a convertible note) from folks like Dave McClure, Jason Clavier and Aydin Senkut. And then, as soon as possible, I will attempt to raise a Series A from a top tier VC like First Round Capital, Benchmark or Andreessen Horowitz.

Is it possible to build a successful business without going through these three steps? Sure. I’ve done it several times, but I have never built a HUGE business. If you want to build a billion dollar business you are going to need a LOT of help. You are going to need the people you meet in the accelerator, you are going to need the people who fund your angel round and you are going to need the help of the partner you work with at the venture capital firm. You are going to need their help to help you get out of your own way. Very few of us have the ability to scale from zero to a billion and we need the best of the best to help us take our nascent ideas to the next level over and over again. Don’t mess around with you business – trust me – raise money ASAP.

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