The Startup Treadmill
Do you know why startups fail? Because they run out of money. Yes, there are lots of root causes: wrong market, timing, team, product, execution. But you can get past these sins and keep fighting as long as you have cash.
Ironically, the reason why startups run out of money is because they raise capital too early. And they raise the wrong kind of capital too early.
As soon as you raise institutional capital of any kind you get on a treadmill where the VCs want you to run harder and burn faster. They want you to use their capital to accelerate – spend, hiring, marketing and ultimately growth. Acceleration is of course why you raise money and give up part of your company in the first place. But premature efforts to accelerate usually don’t work.
Now, this might seem pretty rich coming from a guy who used to make seed investments for a living. The funny thing is that I was always concerned about this. And for what it’s worth, my two most successful investments to date: Unbounce and Frank & Oak are companies that had revenue and traction before they raised a penny of VC.
The thing with treadmills is that no matter how hard you run, you don’t get anywhere. And when you try to do unnatural things to your company too early, the same thing happens. You’re just not ready to run yet.
This is exacerbated in Canada by a few factors:
i.) Our seed rounds are too small. If you raise < 18 months runway you don’t give yourself enough time to create value and proof points before you’re fundraising again.
ii.) Our valuations are too low. This is in part what makes seed rounds so small. We don’t pay up. The funny thing is that if investors paid up and put in more capital from the start, more of their investments would succeed. Call it startup karma…
iii.) We don’t have enough angel capital. If I look at the biggest successes in Canada many of them were funded by angels for a long time before getting on the VC thing. Shopify was 6 years old and had crazy traction before raising VC. My current company, FreshBooks, is 10 years old and still has not raised VC.
Angels have different objectives than VC. They’re not about putting $ to work. They actually want you to get to profitability on their money. So you spend it differently. And in doing so you give yourself more time. And that time allows you to actually get somewhere. You move forward vs. running in the same place.
When you raise VC too early and you don’t raise enough to actually get somewhere, you get yourself in a vicious cycle. I know one CEO who is perpetually fundraising – a few hundred thousand at a time. He did a seed round, seed extension, pre series A thing, etc. It’s death by a thousand cuts. He’s nowhere yet and he’s already given up a lot of his company.
I think it’s a far better strategy to wait to raise capital. Be a big fish in a small pond. When I attended Techstars demo days in the past, the companies that got the most buzz (and funding) were the ones that were furthest along. Companies that were probably ready for series A, did the program and ended up positioning themselves for monster rounds with way less dilution.
Now, I realize the implications of postponing raising money. It means you have to bootstrap. Which probably means fewer startups. I don’t think that’s a bad thing. It should be hard to start. Less supply would concentrate resources behind fewer startups. Seed rounds would be larger. Maybe rounds would get bid up. These are all good outcomes.
If you’re midstream on the VC treadmill, I hope this gives you pause. Take time, before you run out of runway, to make sure you’re going getting somewhere. A bridge that doesn’t get you to the right place is just a pier. If you’re pre-VC, then I hope this encourages you to take your time and make real progress before raising VC. Great things take time. And that’s not a bad thing.