The Tricks to Raising VC Money. Don’t Do It.

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Must sound like strange advice coming from a VC. I give this assistance from bitter expertise being on the receiving end of many rounds of venture capital funding. I have gone through the worst (and less so, the very best) of what VC money does to an early stage software company. I learned two very simple lessons:

1. A large amount of money on the balance sheet is the worst thing you could do to your company. The more money that exists, the louder that money begs to be spent. The more you spend, the more blunders you make and the more hooked you get on spending even more money.
2. Money does not resolve operational problems. If you don’t possess a worthwhile distribution model, spending more money won’t make it more profitable. If your product is not solving the customer’s pain point, more money won’t create a better product.

Hence my tips… Just don’t raise VC money. Especially if you are going through one of the following symptoms:

•  You’re having a hard time increasing your revenue. That usually is a symptom of a product that is not addressing a strong enough customer pain point. Or a product that is not addressing a pain point very well. Either way, the only way to solve that issue is to hunker down and devote more time with customers to comprehend their pain exactly… and engage them in helping you layout the product solution they would be delighted to use.  More on this here.
•  You’re having a challenging time approaching profitability. This is typically not a problem for organizations that have not raised any money. We take it for granted, but there are truly a lot of technology startups that don’t raise money. Rather they plug along the old fashioned way, by spending what they bring in and can afford to spend.  If you are not profitable, figure out why. Best place to begin is by figuring out how to get your distribution model to profitability.
•  You’re not clear where your next 3-5 years of growth are going to come from. Before you raise money, you must have a very clear vision of how you’re going to give your investors the return they are expecting on their investment. Don’t fool yourself with visions of grandeur. Be sensible, and be truthful with your prospective growth capital investors. If you don’t have a definitive path to a large enough exit, don’t raise.

Now if you really, really want and need to raise VC money, then raise only what you require and not a cent more.  There is a fantasy out there that a company should raise as much as it can in a given round. The thinking is that fund raising is challenging and time consuming and should be performed as little as possible. That is nonsense. Raising more money than you need to have is both unnecessarily dilutive and leaves you with more money than you require (which encourages over-spending).

If you construct a profitable, high growth company, raising further money will not be time consuming or difficult. If your expansion stage company is not successful, you should not raise more money. Either way, you really don’t need to raise more than you require.

Firas Raouf is a mentor to our Portfolio, an engaged board member and plays an active role in investments.

Related articles

• Term Sheet Basics (fitbiztools.com)
• How to Implement a Successful Venture Capital Raise (dohertyassoc.com)
• Report: Number Of VC Funds Raising Money At 16-Year Low (There’s A But) (techcrunch.com)
• Entrepreneurs are from Mars, VCs are from … Mars (finance.fortune.cnn.com)
• Venture Capital Raises $2.7 Billion In Second Quarter, But Funders Drop By 23 Percent (huffingtonpost.com)
• Half of Israel’s VCs Believe We Are Near A Second Internet Bubble (vccafe.com)
• Why I Am Ashamed Of My Early VC Years (fastcompany.com)

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4. Flexibility the First Rule of Venture Money
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