Add logs, pour fuel (VC money), light match (beta release day)

I often bump into entrepreneurs while they’re in the midst of fundraising. I usually ask “why are you raising money?” and what I often hear is, “because we are running out of money” or “in order to quit my job and so I can hire 3 people” or something like that. The arguments often boil down to “I need to raise money to hire these 3 people, so i can do XYZ, and then I’ll have a business.”

This seems backwards. Don’t get me wrong, unless you have a lot of savings and can afford a lot of personal financial risk, money can be a practical enabler of taking the first step, but STILL: what is it about the core of the business that needs the money? Why is the business pulling you in? Why does the business deserve investment? The most compelling rationale for fundraising focuses on why the startup matters, the early traction it has and how the investment will fuel what’s already heading in the right direction vs. overcoming financial constraints (personal or business).

To use a campfire analogy….

….The best campfires (startups) aren’t the ones where you throw some big logs in (ideas), soak everything in fuel (money raised) and the light a match (beta release day). Those fires can be spectacular and short-lived, flaring up and then going dim again just as fast, and consuming a lot of fuel quickly.

….The best campfires are the ones where you prepare the fire pit, gather and arrange kindling (seed ideas, prototypes), arrange smaller sticks in a pyramid (relationship building for early sales), light a small fire (your proof points) and then make sure that flame is growing (validation). THEN, because now you know you have a real fire, you might choose to add fuel (money raised) to fuel the growth quickly.

My point is that the core of the fundraising argument should be about the business, not about the salaries. I get that the biggest expense of most internet startups in the early stages are the salaries, but still, the justification for raising money has to be about the business concept, not just about enabling the people to overcome their personal financial constraints. Simply saying “I’m building a startup but I need money to get paid” is like saying “We’re building a campfire, but I need gasoline to keep warm” – it doesn’t make a lot of sense in the context of investing. (Alright, this campfire analogy is getting old)

Counter-point: being penny wise and pound-foolish isn’t a good idea either. Sometimes adding fuel can get a great fire going quickly, and struggling along with insufficient funds can be too limiting. To illustrate, here’s a video of Mark Maunder and I attempting to make a fire without matches (skip to 1:14):

5 Comments on "Add logs, pour fuel (VC money), light match (beta release day)"

  • I really like how you describe this. This is one of those things that I'm always thinking about. I'm in the midst of trying to grow my business and one thing that I've been going back and forth on is whether or not to get some investors or just continue to bootstrap it. When I think about accelerated growth, it sure would be nice to have some money to pay people to x, y, z. However, I like the second campfire analogy where you gather and arrange kindling, get the early sales, proof points, validation, and then if you really have to grow faster, find some funding.

    There's one thing that I'm learning such as how to overcome the salary issues for hiring people and that is make sure you find out what their financial goals are. If you have a real business model where it can generate real profit, then showing a person a clear path on how they can reach their financial goals may allow you to bring that person on without having to give out large salaries. Joe, what's your experience say about this? Have you ever tried to do approach it this way instead of raising money?

  • I like your campfire analogy and I think it works well to illustrate that simply having all the raw materials is not enough but that you also need to apply them in the correct order.

    Care to extend this analogy to angels and seed funds? Would they be the friendly boy scout who happens to wander by with a lighter when you don't have any matches? :)

  • I love your extension! And cloud computing would be the guy driving by on the 4-wheeler selling firewood :)

  • >>Joe, what's your experience say about this? Have you ever tried to do approach it this way instead of raising money?

    I am doing it now for my new venture (boot-strapping, getting cashflow, etc). In my last company, where it was a consumer play (get big or it doesn't matter anyway) we had the following strategy:
    - work for up to a year with no pay to validate the concept and market
    - raise enough to get traction

    Again, it was consumer ad-supported, so that makes it harder.

    My new company offers service and set of tools, so it makes money with each customer. I think I can grow it organically without investment (other than my self-funding it in the early going). I haven't had to cross the bridge of the reduced salary / longer term upside equation with employees yet since everyone is part time, but will probably in the next few months….maybe we can have coffee sometime to compare notes.

  • I'd be happy to share with you what I've been doing. I'd love to hear your feedback. I'll email you later to set up a time to meet for coffee!