I don’t necessarily consider myself old school. The very nature of what we do at YENA is quite rebellious, but there’s a trend happening at the moment that bugs me.
Firstly, this is what a for-profit business should look like:
Money made = More than money spent.
But for some reason, there is – and has been for a long time – an obsession with fundraising without valid reason.
I’ve actually had conversations with people where they’ve mentioned wanting to raise “about £150,000” who haven’t even worked out their business model yet or really what the money is for.
The answer of “Oh it’s for building our community” is all well and good but can you show me an MVP that proves that just one person in that community will buy it? How about 100? Then we’re talking!
So, how can this be?
Annoyingly, I believe that the same thing that’s making entrepreneurship popular – undeniably important for the growth of the economy and the planet as a whole – is also the thing that’s perpetuating this trend: Sensationalist PR.
Now, don’t get me wrong, I’m a big fan of making a song & dance about everything we do but what we’re starting to see from this trend is that people are growing up in a generation where fundraising is celebrated as success and not as a bridge to success.
My issue is with 2 things:
- Those who celebrate the fund raise as if they’ve ‘made it’
- Those who go out to raise funds before deciding on an actual business model
Point 1 – Those who celebrate investment rounds like they’ve ‘made it’
Stop partying. This is where the hard work starts.
I understand that after a likely long, arduous process of raising funds from hundreds of meetings with investors, you’re going to want to let your hair down before cracking on with business and also raise the profile of what you’re up to, to help power sales – that’s ok.
But you needed the cash to go and make things happen… So go and make ’em happen!
Investments are not donations. If you’ve managed to find a generous philanthropist then I’d love an introduction.
Investments mean taking a chunk of someones money and making it your job to turn it into more. A recent YENA speaker, Matt Pennycard from Downing Ventures cited that VCs in particular are looking for 20x ROI to cover their risks and losses along the way. So get your head down and start generating a return for those people willing to take a risk on you.
Point 2 – Those who go out to raise funds before even deciding on an actual business model
With a few (very few) exceptions, this is just naive and/or lazy. I’ll explain…
With so much technology, ways to learn, marketing ability, people eager to get involved in startups and support around nowadays (YENA memberships are here, wink wink) you have a better chance than anyone ever to build a business in a lean way, but please prove the model first.
Maybe build a focus group on Whatsapp, start a small meetup, create a Facebook group, get a few pro bono or discounted clients, build a mailing list, create your branding on Canva – there are so many ways to ensure cost efficiency in starting up, that £125,000 is a crazy ask before you’ve even tried.
The reason I’m allowed to say this and stand by this is that I built YENA as just one person, to a critically acclaimed meetup across 4x UK cities, a database of over 1,500 people and an audience of potential customers actually asking what they could buy from YENA, all with nothing but a bit of pocket money and a few spare hours.
I challenge you to do the same in MVP’ing your startup.
The investors we know here at YENA are likely the most open by nature of wanting to hear from young entrepreneurs, but, by making yourself the 1 in 10 that day who have actually generated some revenue or have some idea of how you’re going to do it, you’ll have a better chance of raising funding. Period.
I understand that there are expectations to the rule but sadly, not everyone is Snapchat. And good. Because my final beef is with the valuations people put on their companies (even at IPO – Initial Public Offering).
Your valuation is (probably) crazy
Let’s say your company has made losses of over $10,000,000 for the past couple of years and reports on your business say it “may not achieve profitability in the future”, what would you expect it to be worth?
Well, based on the formula for business above, you’d expect to say $0. In fact, a company that continues to make losses and just lives on investor money, isn’t a company at all, is it?!
Yet that is actually a real life example… of Yext, who saw their IPO achieve a $100m valuation, propped up on investor cash, stretching their way to the finish line where they’ll take their IPO cheques and continue to survive on that.
As a relatively small business, if I saw the sort of financials that Yext were seeing over that period, I’d start pushing panic buttons. That’s why big corps need to start thinking lean, like a startup and like an actual business.
Yes, my disclaimer here is that I don’t know their strategy and yes, ‘bigger thinking’ may look at a 5-7 year move into profitability for big business, but, if you can start that process actually in the black, then maybe, just maybe, the road to that big valuation will be smoother, faster and with nicer investor meetings along the way.
My final thoughts?
So the next time you’re watching Dragons Den and think ‘oh maybe I could raise £200,000’ , also ask yourself ‘are you ready?‘, ‘Do you need actually it?’ And ‘are you actually a business yet?’.
Can you be one without the money? If so. Get to work.