Should I Raise Funding?

You may wonder why I’ve placed this section in the chapter on mindset. The mechanics of raising funding are straightforward, but I’ve found the internal struggle a founder faces when deciding whether to raise funding is often more challenging.

I’ve never been anti-funding. But I am against the all-or-nothing narrative that you should always or never raise funding. I find extreme absolutes are usually unhelpful, especially when deciding if you should accept outside investment.

Being anti-funding is like being anti-hammers. Funding is a tool, and you should learn when to use it and when it’s not a good fit.

Ten years ago, it was much more difficult for bootstrapping founders to raise money while using a capital-efficient approach to growth and not being pressured to raise additional funding every 18 months. Most investors, whether angels or venture capitalists, share the mentality that once you raise funding, you are seeking to grow fast enough that you can raise a Series A funding round and shoot for a billion-dollar outcome.

Venture capitalists weren’t interested in giving a few hundred thousand dollars to a founder whose vision involved organic, natural growth. They were looking to invest in unicorns (billion-dollar companies). The way to build a unicorn company is to raise funding, grow quickly, and repeat that cycle about every 18 months, diluting founder equity and potentially forcing a great $20-million or $30-million business to grow past its logical limit. This often implodes because the founders try to force their company into this “unicorn-or-bust” model that most venture capitalists seek.

These days, though, capital that doesn’t force you onto the venture-funded track is much more accessible. It’s now possible to raise an angel round or join an accelerator like TinySeed that gives you a boost without tying you to the venture-funded track.

Raising $100,000 to $500,000 after you have a modicum of initial traction won’t solve all your problems, but it can certainly make things less stressful and can buy you the resource no founder ever has enough of: time.

If you’re working nights and weekends, raising enough to fund a year or two of your salary can be a game-changer for your company. Being able to quit your day job and focus full-time makes a night-and-day difference in achieving escape velocity.

If you’re already full-time, raising funding to hire someone who can take tasks off your plate can be equally powerful. It’s incredible the boost you can give your business when you’re no longer stuck in the code or the support treadmill.

Funding can be a powerful tool—but you need to know what you’re getting into.

What will you do with the money? How are you going to deploy it to grow the company?

It is tough to find an investor who will give you money if you don’t have a plan, and it can be dangerous for your business. If you don’t know what you’re doing, money will not fix that. You’re just going to make bigger mistakes, faster.

I generally don’t recommend raising funding before you have some semblance of product-market fit because (A) your valuation is lower at this stage, and (B) you’re likely to burn through most of that money just trying to find product-market fit.

Your capitalization table is a list of who owns what percentage of your company. Literally: Rodrigo owns 70%, Janine owns 20%, and Fred owns 10%.

Your cap table can get complicated if you start taking multiple rounds of investment. I’ve seen cap tables with 40 entries, where the founder still owns 50% of the company, a bunch of angel investors own 5% each, and early employees each own 1% to 2%.

A complicated cap table isn’t a deal breaker. But you can torch your cap table if you let early investors or founders take too much of the company. We’ve had multiple companies we’ve been unable to fund because of their cap table.

One was a company where the founder only owned 30% because he’d given up 70% to an agency he was working with in the early days. Another founder gave 60% of her company to an early investor who had only invested $50,000.

When you let early investors take too much, you end up shooting your business in the foot by making it uninvestable. You also put the majority of the profits into someone else’s pocket.

You can also torch your cap table by not vesting founder equity. If you start a company with two other people and split it equally, but six months later one of your cofounders gets a full-time job and leaves, they still own 33% of your company. You and your remaining cofounder are stuck working the next five or 10 years growing a company and putting money in your ex-cofounder’s pocket.

This also creates a problem if you want to raise money. Normally in first-round funding, investors want to make sure the founders who are actively working on the business own 80% to 90% of it.

This can be fixed with vesting, where you get zero shares during the first year you work at the company and 25% of shares after the first year, then the rest drip out over the next three years. Those numbers can vary—you might decide to say it’s three years to vest. Just make sure to talk to a lawyer when you set it up.

There are a lot of dynamics when it comes to raising money, and, like I said before, raising funding won’t automatically solve your problems.

At the end of the day, raising money can make the downsides of your product or business model worse. If you don’t have product-market fit, haven’t found a good marketing approach, or are working inefficiently, raising money can exacerbate those issues.

But raising funding also has the potential to save you years. As Craig Hewett, the founder of Castos, told me, funding allows you to “live in the future” by making investments you otherwise would have had to wait for.

When Craig Hewett raised money for Castos, he spent it on hiring senior sales and development team members rather than the juniors many startups are forced to hire because of a lack of cash. This allowed Castos to make progress fast.

Ruben Gamez, the founder of SignWell, used funding to invest in compliance (SOC2 Type 2 and HIPAA). They would have done so eventually, but they wouldn’t have been able to afford it until later. This investment allowed them to start closing major deals sooner and grow faster.

Strategic hiring can be another way to spend funds. Jordan Gal, the founder of Rally, hired a chief of staff almost from day one. He told me, “Money allows you to hire in such a way that you, as the founder, can focus on whatever your superpower is, with far fewer distractions than when bootstrapped.”

Derrick Reimer of SavvyCal burst into a crowded scheduling space by investing funds into SEO and marketing earlier than he would have been able to if he was purely bootstrapped. This potentially shaved a year or more off his marketing efforts.

Those are just a few of the ways funding can help when applied strategically.

There are three main drawbacks to outside funding.

The first is the time investment. A typical angel round can feel like a part-time job, taking 10 hours a week for three to six months. Getting accepted into an accelerator might only cost you the time to apply, handle interviews, and work with legal counsel to review and sign the docs. But there is a definite time investment involved in raising, and during those hours you won’t be working on tasks that could drive your business forward.

The second is the added complexity. Anytime you add someone to your cap table, you have one more entity involved. Even if investors have limited or no rights in decision-making, you have an external source to whom you need to report financials, keep updated, and potentially obtain signatures from if you make certain changes to your corporate structure.

Finally, there’s the fact that you are selling part of your company to someone else. The idea, of course, is that the funding should allow you to increase the value of your company far more than the value of the equity you sell. But that ultimately falls back on your ability to execute and grow the business with the funding provided.