A startup died today. (A thousand other startups died today too, but just as we mourn our own family and friends more than strangers, so we mourn the startups we know more than the masses of others.) In mourning, those of us who knew this company started asking the question, “Why?” Why did this company die?
On the surface, the reason is simple. The company ran out of money. No money, no payroll, no inventory, no customers, and thus no company. The more interesting questions are another layer of questioning. Was this death inevitable? What might have been done differently to save it?
This particular company was in the news just nine months ago, announcing over $1 million in funding. Big, exciting news! Just the type of news the startup media loves to cover.
What those stories never mention is the bargain that comes along with those funds. Investors provide the money with two expectations. First, that the money all be spent within a year, at most 18 months. Second, that the money be spent to reach specific (but rarely published) milestones to justify another round of funding before it runs out. When you subsequently hear that a company is shutting down (or selling itself as a acquihire), you know those milestones were not met.
No matter how many news stories, books, and movies you watch about startups, I doubt you’ll ever hear mention of this bargain. Instead, all these stories make entrepreneurs think that they must have a venture capital investment to have a real company. This is so common I can’t remember the last time I met an entrepreneur who didn’t include at least a round of Angel investment in their pitch.
Some startups have no other choice but to seek such funding. If the business can’t work without $100,000 of equipment, and you don’t have $100,000, then it needs funding. If the business needs a $50,000 mobile app, and you and your co-founders don’t code, its probably not viable to wait until one of you learns Swift. Or sometimes, there is an opportunity that may disappear if you can’t launch and start selling right away, then perhaps you may want to buy yourself some market share.
For every other business, the reality is that funding bargain may not be worth the cost. The reality is that funding is just a shortcut. It provides a way for you to more quickly get a product into the market. More quickly build a team. Potentially more quickly make sales. And potentially grab some early market share. But if any of those potential fail to happen quickly, that funding closes its noose and kills off all future potentials for your company.
My advice to all entrepreneurs is to spend time on at less common question. Can you bootstrap your company? Can you achieve your goal with your savings and a crowdfunding campaign? Can you pre-sell your product to customers before it is built? Can you start by consulting, automating the processes to turn the consulting into a product? Is there any other way to get started without blindly jumping into this bargain trading capital for time?