Entrepreneur Office Hours - Issue #24
How to know when a VC is interested in investing, how important is luck in the fundraising process, and when to start fundraising
I don’t intentionally theme these weekly issues, but, this week, a clear theme developed organically. In fact, let’s just go ahead and call this “the fundraising issue.” You’ll find two articles about raising capital and the Q&A is focused on fundraising, too.
Plus, on this episode of Web Masters, my guest — Raj Kapoor — is the former founder of Snapfish and the current CSO of Lyft. In between those two jobs, he was a successful VC. You’ll love his story about fundraising in the late 1990s. He raised almost $40 million before he even had a launched product. Sheesh! Those were different times…
Thanks, as always, for reading. And thanks for sharing. Each week I’m getting more new subscribers thanks to shares of these newsletters, so I’m glad to know they’re valuable and worth passing along.
Keep sending your questions, and I’ll keep answering!
Interpreting investor interest isn’t alway easy, and there’s a good reason why. Investors aren’t your customers. In the investor-entrepreneur relationship, you’re the customer!
The MBA Who Predicted the Future of Photography
Before Raj Kapoor was Chief Strategy Officer at Lyft, he was the founder and CEO of another well known consumer tech company called Snapfish. In fact, the business strategy he’s deploying at Lyft is a strategy he began developing at Snapfish over two decades earlier. It's a strategy that requires "seeing the future."
Hear how he does it on Web Masters:
…or search “Web Masters” wherever you listen to your favorite podcasts.
Saint Patrick's Day got me thinking about luck and the role luck plays for entrepreneurs, particularly when fundraising. In my experience, the best entrepreneurs are great at creating their own luck.
Office Hours Q&A
If a startup has developed a solution (for example software, some successful pilot projects and some experience in consulting) but not yet found any paying customers, is your advice to seek angel investors, not VC?
This question came to me in response to an article I published called “Here’s the Real Reason Entrepreneurs Struggle With Fundraising.” Definitely go read it if you haven’t already. One of the key points, though, is that VCs invest in progress, whereas angels tend to invest in potential.
By that logic, the question here does seem to sync with my advice. And, if you’re going to try to fundraise based on an idea rather than traction, then, yes, target angels rather than VCs. VCs will be a waste of your time, and you’re certainly more likely to have better luck with angels.
However, all that aside, the truth is if you’re struggling to get paying customers for a solution you’ve already developed, you shouldn’t be fundraising.
This is a mistake I see entrepreneurs making all the time. Heck, it’s a mistake I made for wayyyyyyy too long in my career. Fundraising has become such a highly publicized part of entrepreneurship that entrepreneurs increasingly think raising capital is Step #1 in launching a company. But that’s backwards!
Successful entrepreneurs don’t raise lots of money and then go build great companies. Successful entrepreneurs start building companies, begin getting traction that validates their work, and then -- if and only if they need it -- they’ll raise capital in order to help them capture the opportunity in ways they otherwise couldn’t have without that money.
Yes, I realize things don’t always work out that way. Yes, I realize people have raised money on ideas. And yes, I realize people have raised money with products and no customers. But that doesn’t mean it’s what you should do. Remember, people also drive drunk and don’t hurt anyone, but it doesn’t mean they should be doing it.
While it might seem a bit trivializing to compare the consequences of drunk driving to the consequences of raising capital without traction, this is the point where I feel compelled to remind you that entrepreneurship and entrepreneurial action have very real consequences. While you might not think you’re hurting anyone by taking investor money for an unproven idea, that money comes from somewhere. Maybe it’s someone’s savings. Maybe it’s part of a pension fund. Maybe the person you’ve convinced to invest doesn’t have as much money as you think, but you’ve done such a great job selling your unproven vision that you’ve convinced the person you’re going to solve all their financial problems, so they take a risk and, when your venture fails, it ends up hurting them more than you realize or may ever know.
In other words, yes, fundraising without paying customers is possible, but I don’t encourage you to do it. The fact that you’ve built something and don’t have paying customers should be a giant warning sign telling you something is wrong with the opportunity you’re chasing and/or the way you’re chasing it. Until you figure out what’s wrong, don’t waste your time fundraising. Instead, focus on trying to fix your venture. In fact, raising capital won’t solve your problems. If anything, raising capital is going to make the problems worse.
Got startup questions of your own? Reply to this email with whatever you want to know, and I’ll do my best to answer!