Why Most Start-Ups Should Never Raise Money

There’s a fascinating conversation recorded (you can read it, too) between Jason Cohen of A Smart Bear and Edwin, who runs a new service called MeetingKing.com. The entire conversation is interesting, mostly focused on how to present a business to customers and where to focus the marketing message, but this segment on fund raising really struck a nerve. I’ve shortened it (but not changed the wording) considerably to make it more reasonable to read here:

JasonRaising money completely changes what the company is and what the outcomes can be and what your job is.  

Let me ask you this: what is it that you want as the endgame of this company? Do you want to make a billion dollar company? Do you want to make a company in which you personally take home millions of dollars, but it doesn’t really matter what other form that might take as long as that’s happening? Do you want to keep it a tight group of people where you know everyone’s name forever and it’s just a high-performing, awesome group of people? Or do you want to have a thousand employees someday? What is your goal with the whole company?

Again, regardless of how you get there. What do you want? What would be the best end-state for you? Do you want to sell it someday?

Edwin: Yes, but that’s not short-term. In seven years my daughter will go to college and travel is my biggest hobby so it would be great if I can
cash out successfully in seven years. But before that, I would like to build a profitable business, a business that can exist on its own.

Jason: Okay. Why?

Edwin: Well, because I think that’s the very essence of a successful business, that you can make profit with it. I think it is the ultimate measure of you’re offering value to people that they are willing to pay for it. Yes, I think I would get a lot of satisfaction out of that, and I am already getting that.

Jason: That’s true. Okay, and when you say you’d like to exit someday in the next seven years, let’s say between now and seven years from now, what kind of money are we talking about that you want to have from that exit? If it’s half a million dollars, that’s not enough.  I’m guessing if it’s $500 million, it’s enough. So what’s the minimum you want to get out of it to where you’re like bang, I got enough money on it that I never have to worry about money again or whatever it is that your goal is.

Edwin: Ten million, I think I can be very, very happy for the rest of my life.

Jason: Okay, so all the things you’ve said so far are telling me do not raise money. So you said I value making a profitable company. That’s
important to me that it be profitable. That’s the point. That’s the measure of success is that it’s a self-sustaining, profitable, growing company.

When you raise money, that isn’t the goal. That is explicitly not the goal, and that won’t be the goal for those seven years that you’re talking
about wanting to run this for roughly. I know that’s rough, but still. It won’t be the goal, and it won’t be the kind of company that you’re building. So it’s interesting that the fact that that’s kind of against your nature, which I totally understand by the way and agree with that nature, but that isn’t what the goal will be. So that will be dissonance for you.

The second thing is exit. There is no venture capitalist who wants an exit in which you would only make five or ten million. And the trouble with that is you would be happy with that exit, again, assuming it’s a fair exit of course. But assuming it’s a fair exit, a venture capitalist, and I’m explicitly not saying angel because we could talk about angel and they’re sort of special so that might work out.

But a venture capital, if we’re talking about institutional money, venture capital is not interested in any kind of outcome where that’s all the money you make because it means they wouldn’t have made much money and they’re not interested in that. They’re not signed up for that. And to be fair, when you take their money, you’re not signed up for that either or you shouldn’t be.

I’ve talked to lots of budding entrepreneurs over the years. Most of them want to raise money. Most of them want to build profitable businesses with a tight team that could have a reasonable, human-sized exit. Jason so starkly points out that these goals — VC money and profitable, reasonable-sized businesses — don’t match.

I may have to refer people to this post in the future.