Balancing raising money with raising a company

For startups, it's tempting to make raising money the business plan, but here's why you should avoid it and what you should consider instead.

A startup founder recently shared the business plan with me for next year. I was surprised that the backbone of the plan was raising money in the next 12 months. A list of potential VCs, a regular travel schedule out to the West Coast, and a clear idea of the check size she wants pulled it all together. The good news is, this kind of clarity is terrific and really shows her drive. The bad news is, it almost begs the question, if this is next year’s plan, what kind of drive is it showing?

Is it a drive to build a worldclass company, a hunger to serve customers, or a focus on raising money? Because raising money is one thing I’ve never heard a customer ask for. Most customers rightly figure they’re paying their own way in your shop.

Don’t get me wrong–there’s no doubt fueling hypergrowth businesses takes capital. In fact, most companies can’t hire the sales and marketing support they want. Most companies need capital to start, too. Most companies are your block-and-tackle  restaurants, caterers, marketers, dry cleaners, consulting companies, or manufacturing companies that don’t even have the option of raising venture because their business speed of growth doesn’t warrant the risk in the time frame frame.  Do they need business development reps any less? Hardly.

So since all businesses have growth constraints and all founders try to remove them, raising money (or getting a loan, freeing capital by reducing costs, or finding equity partners) is just part of executing a business plan. The thrust of the plan is the business success through customer success. Raising venture capital in particular is one of the least rewarding activities for a solo founder, because the execution cost (time) is extremely high. Who motivates and builds the team for customer success while the founder is busy motivating VCs? That’s one of the hidden reasons why so many companies that go the venture capital route have multiple founders; they can divide and conquer on the customer, team and finance fronts while losing less momentum. What I also know from this side of the fence, as I dig into venture capital at Valor, is that many VCs have teams of analysts looking for hypergrowth companies and constantly calling founders to see if they’re a fit for capital. The idea we have that you have to beat the bushes to find VCs is already a misperception. If you have a fast growth company over a million, they’ll find you.

So rather than thinking about raising money as a stand alone strategy, one of the ways I like to think about growth planning is with a high, middle and low potential outcome.  You can plan for high growth—and perhaps devoting time to raising capital makes sense to get the option of faster growth. The middle plan is your sketch of how you execute, should the dreamed-for capital not come through. The “low growth” or no growth option also bears some planning–what happens if it’s an awful year? What’s your keep-payroll-keep-customers back-to-the-wall plan? This sort of frame keeps you in control of the business instead of outsourcing control to your financiers.

Financing a business is complex and it doesn’t get any easier as the business grows. The number one way to finance a strong company is through its customers. Customer success, not raising capital, is the “dream.”  I appreciate founders that creatively embrace the business complexity while still staying focused on the business core—customers. Do you have any books or tools to recommend that help get this delicate balance right?