When you speak to most founders or aspiring entrepreneurs, you’ll quickly realize that raising money from venture capitalists is an expectation, not a choice. When we started Brevitē, a company with a mission to help creators create, we were surrounded by fellow-founders either raising venture capital or running venture-backed companies.
Doing the same seemed to be the righteous path. But after advice from mentors, we decided not to raise an investment round at that time. We were already cash flow positive, and we wanted to see how far we could get on our own.
Venture capital does play an integral role in the startup ecosystem. Many ideas would never reach the market without it. But it comes at a cost. Most founders and investors view it as pay-to-play: take investment and launch or scale your company rapidly, or don’t take investment and be a fledgling startup. Reflecting on our experience over the past few years, there is also an argument to not raise venture capital, or to at least wait.
We’re First-Time Founders
As first-time founders, it may be difficult to catch the attention of investors. If you do find investors, the cost of capital, or how much your investors are paying for your company’s equity, may come at a high cost to you. This is especially true if your company has little traction. And investors have every right to do so. They are taking a bigger risk on founders with little experience and companies with little traction.
Even with experience, setting up a business is hard. You are tasked with executing in so many different areas, like managing a global supply-chain, forecasting inventory, designing products, coordinating shipping logistics, ensuring strong customer service, marketing, and distribution. The list goes on. Now, executing on each of these is very achievable, but executing flawlessly and better than your competitors, which is essential to success, is extremely difficult. Poor execution in any of these areas can sink your company.
We’re the first to say we’ve made mistakes at every step: we’re on our fourth warehouse, we’ve had defective inventory lots, and we’ve wasted plenty of money on incorrect assumptions. If we were to face these issues at scale, it would have been disastrous. There’s no handbook that tells you the perfect warehouse or factory for your business needs. It’s experience, mostly from mistakes, that help you make the right decisions. It has made the company stronger and puts us in a more favorable position should we decide to pursue investors in the future. By no means have we perfected each area of our business, but we’re much better than when we started.
We’re Learning to do More with Less
Any CEO or founder will tell you that achieving profitability is hard. Really hard. Companies are cash eating machines, and before you know it all the revenues you worked hard to earn can slip through your fingers like sand. Even with revenues in the millions, after paying for product, payroll, marketing, and the myriad of other unavoidable expenses, you’ll quickly realize there’s not much left over.
When companies receive large investments, inexperienced founders and operators may not learn the financial discipline required to run a company. Instead, they may blindly spend without realizing that how their allocating cash really isn’t driving growth. The same is if you have $100 of cash in your wallet. By the end of the week, whether you like it or not, you’ll probably spend it.
We recently printed a black and white sign in our office that read, “scarcity drives creativity”. A few weeks later, someone reprinted the same sign, except this time it was in a colorful font. This sign was symbolic of how we’ve learned to view every part of our business. When you’re relying on your own bottom line to fund your company, you’ll learn that every dollar counts. And when every dollar counts, you will get creative to save and optimize where you can. You’ll question how much you’re paying for your product, how you’re marketing, and whether or not initiatives, vendors, and other expenses are really contributing to growth. You’ll learn how to monitor the small dollars, which you’ll quickly realize really are the big dollars.
Learning to do more with less is integral to any company’s success. And there’s no better way to learn to do it than by actually having less.
We Want to Raise Money on Our Terms
Depending on the health of your business, raising venture capital can either be on your terms or the investors terms. As a founder, you want it to be on your terms, or at least a happy medium between the two parties. In our case, when we first considered raising venture capital, our revenue was low and we had little understanding of where we wanted to take the company. It was more of a “that’s what everyone else is doing”. When you’re in this position, it generally leads to one of two outcomes: 1) giving a lot of equity away for assumedly not much money, or 2) no investment.
The basic economic principle, price elasticity of demand, can explain a founder’s propensity to raise venture capital. The principle goes like this: if you’re driving with a full tank of gas and you pass a gas station that is charging $10 per gallon, you likely won’t stop for gas. Instead you’ll wait until you find a gas station that is charging $3 per gallon. But if you’re driving with an empty tank of gas, and you really need gas at that moment, you most definitely will pay the $10. And if you’re driving through a desert with an empty tank of gas and the next gas station isn’t for 100 miles, you will even pay $100 per gallon.
If you’re desperate to launch, scale, or pay bills (in other words your car is out of gas), you’ll pay whatever you can for your company to survive. You may even be forced to compromise on your values. Investors often have their own agenda, and if you have the wrong one you may be surprised on where you’re forced to compromise. At Brevitē, we identified positive impact as a core value of ours. This includes having a positive impact wherever possible, from promoting sustainability, to ensuring we do business in an ethnical manner. Having the right investors that also uphold these values is important to us.
But If you’re not desperate to launch, scale, or pay bills (you have a full tank of gas), you’ll be in a position to wait or negotiate until you get a deal that is favorable to you. We’ve spent the last year designing a better product, refining our brand vision and its path forward, and building strong end-to-end operations. Our primary strategic goal has been to set up a business that is able to scale with no hiccups. We ask this question for every initiative we launch: is it scalable? Once a business has a strong foundation, it will be in a much better position to actually raise money on the founders terms.
We’ve never closed the doors to venture capital investors as a possibility in the future. But the best decision we made as a company was to wait. It allowed us to learn our business at an intimate level, plan for scalability, and develop a shared vision. Fundraising is also like a full-time job. Your time may be better spent building your product, understanding your customers, and improving your go-to-market strategy. To investors, you’re only as good as your track record. So make sure when you go down that path that you and your company are prepared to hit a home run.
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