11.07.05
When does it make sense to get external funding?
Since I am going to moderate a panel tomorrow on funding for growth, it gets me thinking on when it makes sense to get external funding. Here are some of my thoughts, feel free to add in your thoughts on this to make it complete.
- You have proven that business model and selling process work, and want to infuse money to scale up and duplicate the existing process to a much larger customer base or various vertical sectors.
- The space is accelerating quickly and top 1 – 2 leaders will likely to take majority of the market share. You need money to become the leader in this space. It is critical to determine whether the market/money is really there as you projected since a lot of the new trends are just hypes produced by technology industry itself. If the market is not there or takes a long time to develop, adding external funding to accelerate your process is like boiling ocean with lamp heat…
- You need to build strategic partnerships and want to leverage financing to secure/sweeten the deal. The strategic partners can be corporate or IPO bankers.
- You truly believe your product idea is unique and innovative and you are looking for funding to finish it. If this is the case, I would suggest you do as many customer validations as possible so that you are not wasting your own time/energy and VC funding. I see many cool advanced technologies that are ahead of its time. Millions and millions of dollars pours into a project that is not ready for the prime time.
- You are a super-smart techie and want to find partners who can complement you on the business side. Funding from a top-tier VC will give you an edge to fine-tune your offerings and help you sharpen business model. If this is the case, don’t be cheap on the equity. A small percentage of a huge pie worth a lot more than a small pie.
- Probably most important of all, you absolutely need external funding for growth. If you have enough money to fund your own company and can forsake a salary, then you might want to delay funding till later date for a higher valuation or better capital efficiency.
Since I only allow myself 15 mins for this write-up, this is what I come up. Probably a lot more bullet points if I give it more time to think through. Of course, that is part of discussion we will have tomorrow: http://www.sdforum.org/positioningforgrowth.
I have seen a lot of founders get washed up in multiple rounds of funding. My advice to entrepreneurs is to know thy self and your business cycles before blindly follow a cookie-cut formula of venture funding.
