Should you raise capital?

"Getting investors is like riding a tiger. You don't want to be on it, but once you are you sure as hell don't want to get off it" - unknown author.

In start-up land, entrepreneurs tend to measure success by how much capital they raised and whether they raised at all.

I'd like to offer a different perspective, which is that raising capital from Venture Capital is a tactic to achieve a goal: delivering a great product that generates sustainable profit long-term that can be reinvested to grow the business.

Let's view raising capital for what it is, a means to an end, and not the end in itself.

Four reasons to raise investment

From my perspective, there are four reasons why you should raise capital: 

  1. You need the capital in order to build your planned product.
  2. You need to scale quickly in order to be competitive (e.g. network effect model).
  3. You need scale to be profitable (have positive unit economics and require large customer base to overcome fixed cost).
  4. You want to alleviate the stress of cashflow and bootstrapping.

Industries where investment makes sense early on are areas like med-tech, where there are long lead times to get a product into market.

Then also network effect model companies like Uber - where more users means it is better for drivers and the more drivers there are the better it is for users. It is a self-feeding cycle, more of one leads to more of the other.

Although, even in Uber's case, they've learned that what customers really care about is price. Drivers only need to be at a critical mass and then the network effect model of more drivers/users doesn't provide the protection they thought it would to dominate the market.

Finally, there are business models that rely on a large customer base to overcome fixed costs and so scaling fast matters. For example, Amazon. As the number of customers grows, the cost per customer decreases (fixed cost is spread across more customers) and so at some critical number of customers you're profitable if you have good unit economics (revenue per customer - variable cost per customer).

For many software and app ideas, which tends to be the case for many entrepreneurs these days, you're often better off getting a technical co-founder and learning through failure, growing organically and building your business.

Reasons why you don't want to raise capital

There are a bunch of reasons why you might not want to raise capital, especially as an entrepreneur early in your journey: 

  1. You retain control and freedom to live your desired lifestyle while building your business (if this matters to you, it is worth considering).
  2. You learn from your mistakes. Instead of rushing to grow you take time to analyse how you operate, learn and improve.
  3. Speaking of learning, you are allowed to spend a disproportionate amount of time learning recognising the gains of this long-term (e.g. 20 hours a week) rather than being pushed to sell.
  4. You get to treat products as experiments, recognising what you build today isn't necessarily what you want to build long-term and so you aren't pushed to keep increasing sales of something you don't want to spend the next 10 years on.
  5. You are forced to serve customers early and to go through the tough yards of building a sustainable business, rather than relying on investment. This keeps you customer-centric and frugal.

As an example of a recent story in Alto, my co-founder Anna took 1 month off to travel through the Himalayas. Now, let's be real, with investors that is not happening - a co-founder 'should' be working 80 hours a week to grow the company.

The truth is, that 1 month off was extremely beneficial to Alto. Anna underwent a personal transformation that helped her be more motivated than ever, helped her foster new behaviours, reflect and become a far better operator.

Alto and Anna are far better off because she could take 1 month off to travel.

Raising capital is not bad

I don't want to advocate against raising capital, I think it is fantastic that such an opportunity exists. When done intelligently, it is crucial to success.

All I argue for is let's make a logical and objective decision as to whether it is right for you as a company, and not measure success by whether you have raised capital.