The Dolphin Dive
There are many reasons why startups fail. From bad timing to poor execution, bad hiring, too much competition, the list is almost endless. Despite these pitfalls, you can always live to fight another day so long as you have cash in the bank. So, for me, the technical reason why companies fail is that they run out of cash.
To avoid this, you need to perfect the dolphin dive. If you’ve ever watched those nature shows, you’ve seen great images of dolphins jumping into the air then diving. They stay underwater for a period of time, and then come up for air.
This is how you need to approach each funding round. Treat it like your last. Make sure your money gets you far enough to either not need more funding or, more likely, to have enough proof points to raise more capital at a significantly higher valuation.
Raise enough money first time
In my previous gig as a seed investor, I saw companies inside and outside our portfolio commit potentially fatal mistakes by raising too little capital in their first rounds. They would raise 6 – 9 months of burn. With follow on round taking to least 3 months at close that left precious little time to add value or generate revenues.
I realize that for many inexperienced founders there is a chicken and egg problem here – how do you raise a larger seed round without a track record? There’s no silver bullet answer, but the fact is that most startups raise capital too early and then spend it too quickly. By raising too early they limit themselves to small rounds and by spending it too fast they significantly increase their chances of not raising more capital – and hence failing.
In my experience, good things take time. Most companies don’t go from idea to exit in the time you read about in Techcrunch. Most toil away in obscurity before breaking out. Plan accordingly.
Raise when you don’t need to
If you can manage your initial funding such that you can get to break even, then you don’t need to raise. This completely changes the fundraising dynamic. When you don’t have a drop dead date in your bank account you can hold out for the right investors at the right time and on the right terms.
The practical implication of this is that:
- You have to match your ambitions to your funding. Don’t try and achieve something that you don’t have enough money for.
- You likely have to bootstrap either before or after your seed round since generating revenues takes time.
No matter how small your actual traction is if you have customers paying you to break even you can live to fight another day
I guess all I’m saying is this: Companies die when they run out of cash. Period. You raise capital to get your business to a place it could not get to organically. This is what creates value. If you can’t get to that destination, don’t assume your investors will bail you out. Going back to that dolphin dive analogy, make sure you have enough air to make it back to the surface, before you double down again.