You take someone else's and for a while, and you give your own and forever

Steve Blank: When is it better for a startup to give up the money of a venture investor

Olga Karpenko, AIN.UA

"Not all that glitters is gold," was the epigraph chosen by serial entrepreneur and one of the most influential people in Silicon Valley, Steve Blank, for his article on the search for investments "Fund Raising is a Means Not an End."

The main message of the article: startups should think carefully before going to venture funds for money. Entrepreneurs need to analyze and evaluate when it is better to attract investments, understand why a startup needs them and, most importantly, what the consequences of such attraction will be.

"For many entrepreneurs, the goal of "raising money for the project" has replaced the goal of "building a stable business." This is a big mistake. When you accept money from investors, their ideas about the business model become yours," the expert warns.

Editorial office of AIN.UA offers a translation of his article on when a startup should ask for money from venture funds, and in which cases it is better to refrain from it.

One of my former students decided to tell me how things are going at his startup. To my question: "What are you working on now?" he immediately began to talk about how he attracts money. Eh... what I would like to hear from him is a story about finding a business model, especially about working on making the product fit the market. But in 90% of cases, the first thing I hear is a story about how a startup is looking for money. It always makes me sad.

Entrepreneurs need to think about when to attract money, why to attract money and from whom to take it. And also over the consequences of such investments.

But you need to start with understanding what a startup is.

A startup is a temporary organization created to find a repeatable and scalable business model. It is worth analyzing this definition in more detail.

"Temporary organization" – the goal of a startup is not to remain a startup forever. The goal is to scale. If you are not facing the task of scaling, you should not attract angel or venture investments, it is better to take a loan from a bank for the development of small businesses.

"Search" – although it may seem to you that your idea is the most brilliant innovation in the history of mankind, it is very likely that you are mistaken. If you raise millions of dollars at the start of your project and immediately bring your idea to life, you will simply spend all this money trying to scale a bad idea.

A "repeatable business model" – startups, of course, can get customers thanks to the connections of one of the board members, or a one-time heroic superpower of the CEO. All this is great, but your sales team will not be able to repeat it. You should look for a repeatable sales scheme, according to which the sales department can work by sending out price lists and monetizing visitors on the site.

"Scalable business model" – the goal of a startup is to attract not one, but many buyers, each of whom would increase your revenue. How to check a startup for compliance with this criterion? If you add another "salesman" or spend a certain amount on marketing, will your income cover these costs?

"Business Model" - answers the main question about your business: who are your customers? What problem do they need to solve? Does your product solve this problem? How do you attract, retain and increase your user audience? What is the revenue generation and pricing strategy? Who are your partners? What resources and what kind of activities are needed for this business to begin to exist? What are your expenses?

Who should I ask for money from?First decide what type of startup your company belongs to.

If you are a small business, there is a chance that the amount of profit from your project is a bit not what angels or venture investors are looking for. Lifestyle-it is better for entrepreneurs and small businesses to ask for money from friends, family, take a loan from a bank.

If your project is scalable, you will need a little money (seed investment) to test your hypothesis. Why small? No startup has ever spent less money than it attracted. In addition, at such an early stage, you will have to give a large share to investors. The source of seed financing can also be searched among friends, relatives, on Kickstarter, and most importantly, such financing can be obtained from the first buyers.

These sources of money are much more tolerant of project restarts than venture funds aimed at startups at later stages.

When to raise money?The goal of a startup is to save cash until a scalable and repeatable business model is found.

In cases where money is virtually unlimited (internet bubbles, frivolous venture capitalists), you can correct your mistakes by simply raising more dollars. In a normal situation, when there is no extra money to fix errors, you devote time to working with clients, adjusting the product to market needs. And only after that you can afford to spend money without thinking about the future.

Don't confuse "raising money" with "building a stable company." In a perfect world, you would never need investors, you would build a company on sales revenue. But to achieve scale, startups need risk capital.

Attract as much money as you can, but only after you have real proof that your product will be in demand on the market.

Consequences of attracting venture capitalThe day you took money from a venture investor will be the day you agreed to his business model.

Here is a simple test: if you are the founder of a startup, go to the blackboard and draw a diagram of how you imagine the work of a venture fund. How he earns, what is IRR, what is the life span of the fund, how much money they will invest in your company during its existence. What share in your company will they receive by the time they go public? What is their benefit?

There are two reasons to accept venture money. The first is unrestrained scaling without looking back to tomorrow. You invest dollars to create demand and engage buyers in sales channels. The second is the experience and contacts that investors can use to help you.

ConclusionsAttracting investment is a means, not an end.

• Save your cash until you find a repeatable and scalable model (focus on fitting the product to the market, test your hypothesis).
• Attract investments of any size only after you are sure of the market demand for your product.

Portal "Eternal youth" http://vechnayamolodost.ru21.06.2013