If Competition Raises Capital, Should You Follow Suit?

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There are a lot of great reasons for businesses to raise growth capital from venture partners like OpenView such as:

• Funding the preliminary development of the product
• Hiring and building a seasoned Management Team
• Developing and executing Marketing initiatives
• Multiplying a Sales force
• Adding operational experience to your organization by way of the board and VC team
• International expansion outside your existing geographic presence
• Credibility in the marketplace
• Adding to the development team
• Operational capital for the balance sheet

And then there is “my competitors just raised capital so I will need to raise capital too”. While that may be a valid motive, it normally is not. At OpenView Partners we focus on investing in expansion stage software companies that are at least 2mm in annual revenues and or bookings up to 20mm in annual revenues and/or bookings that are rising in excess of 100% a year or 30% a year depending on their size and stage.

While it may sound uncommon for a venture capital partner to tell a founder and/or CEO and their management team they shouldn’t raise growth capital we do it from the outset. We suggest that companies not raise venture capital or as little capital as possible until:

• You have your product or service developed and in production
• You have your market segment pinpointed
• You have thorough knowledge of the buyer’s persona and the user’s persona
• You have made repeated sales to many clients in you target market segment
• You have made added sales to current clients or they have renewed their contracts
• You have a comprehension of your distribution model and CAC
• Your growth rate is consistent with or over your segments growth rate taking into consideration your size, stage and market

If you don’t have some or all of the above validation points, then raising capital does not  mean it will assist you in building a profitable company in spite of your competition. Possessing the above information is like switching on the lights in the room. It is about building a repeatable model and it will permit you to effectively leverage the capital to develop a stellar company and leave your competition in the dust.

In prior blogs you have noticed me state that it is not about the money… it is what you do with the money that matters. The actual winners in the market are companies that are better at operational execution than the competition, not the organizations that raise the most capital. There is no championship or award for raising the most capital. Without some or all of the above data points you won’t be able to execute with any capital efficiency. That means you are probably going to waste the capital, your equity and your time.

At OpenView we have a number of portfolio companies that have raised 5-10mm in growth capital while competition has raised 20-50mm in growth capital. These portfolio companies are doing as good or even better than their competition.

George Roberts applies his executive management experience to our expansion stage portfolio.

Related articles

• The Tricks to Raising VC Money. Don’t Do It. (dohertyassoc.com)
• Expansion Stage CEOs: Understand the Power of 3! (dohertyassoc.com)
• Mentoring Venture Capital Companies To Walk The Talk (dohertyassoc.com)
• The Top 14 Ways To Spend All Your Capital (bayviewhunterspoint.com)
• Venture Firms Raising Money at 16-Year Low in Q2 (nytimes.com)
• 11 Lessons for Early Stage CEOs (startupnorth.ca)
• VC funding for web reaches 10 year high (gigaom.com)

Related posts:

1. Strong Competition is Valuable to Keep Your Product Strategy Fresh
2. Be Friendly With Your Competition in Sales – It’s Definitely Worth your While
3. Raising Venture Capital
4. About Venture Capital Structure and Terms
5. How To Submit Your Business Proposal To Raise Capital