Should you avoid angels, VCs or applying to an accelerator if you can monetize your startup early?

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JASON LEMKIN

Well, yes, you should avoid raising money unless:

(x) you need it or

(y) it’s dirt cheap.

Look at Dell. Notwithstanding its current market challenges, Michael Dell himself still owns 80% of Dell worth $18.5 billion (see Dell Gets Bigger and Hewlett Packard Gets Smaller in Separate Deals). Atlassian never required any outside capital (wow) other than selling secondary shares later at a high valuation. Qualtrics did the same. 37 Signals, etc. Awesome.

But …

A lot of startups do require capital. They require capital to pay the first developers. Sometimes, they require capital so the founders can put food on the table. To pay for service providers. Lots of reasons.

So if you need capital — raise it. And don’t sweat it. I needed capital to get both my start-ups off the ground, period. But the second time, I funded the prototype out of pocket. This allowed us to skip a true angel round and progress straight to a Series A. That saved a ton of dilution the second time.

Also “need” can also be defined as feeling safe enough to “go for it”. Capital can also meaningfully de-stress your growth, done right. Another good reason to raise money when you don’t technically need it is when you are too worried about going out of business if you make that extra hire or 3. This is particularly important in SaaS and recrurring revenue businesses. You have the leads, you have the momentum. Having a few extra sales reps, building out the SDR team earlier — can clearly have high, positive ROI. But funding it from cash flow is slow.

Watch the CEO of Cornerstone OnDemand, Adam Miller, talk about this below at a recent SaaStr event. One of his top regrets was not raising more money, just so he could hire ahead of the next quarter’s growth, not behind it. He was funding growth from cash receipts. Raise some capital, and pull that hiring forward just a quarter or two — and you can grow much faster:

And later, it gets cheap. Raising money at a $500m+ valuation (which I know sounds like a pipe dream in the early days) = trivial dilution. If someone wants to throw money at you for 2% dilution, and that money is material — take it.

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Published on September 11, 2016
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