Be cautious with raised funds

Getting funding is ‘easy’ there’s lots of it out there, and investors are eager to take big ambitious bets, in some cases all thats needed is an idea, it doesn’t even need to be all the original or unique. In other cases, all it takes is the right pedigree, the right schools, history at the right companies in the right roles and success is assumed.

Since this is the environment, its really easy to fall into the trap, its easy to believe that because you raised funds, you’re going to be the next Bezos, its easy to take for granted that the fund raising is the easy part, traction is the hard part. In a sense its a kind of confirmation bias, the illusion that because you’ve raised a seed or pre-seed round, success is assured, the reality is you’re one of hundreds of companies which have had this kind of luck, at the end of the day its a numbers game.

I was speaking with a founder, great background with time at google, youtube and a string of great companies, came from the right school and to top it of SHE was also a minority, migrant founder, all the right boxes were ticked. Her idea was nice, basically a social networking app. Nothing wrong with that.

But, i was cautious, social networks are finicky beasts, the market is also flooded with competitors, many, better funded, better run and more sophisticated. I was cautious, but i also didnt’ want to burst the founder bubble. Instead we focused on her questions around fund raising.

She was keen to raise funds, she’d had some tentative interest from various angels and friends and family. But i really wanted to caution her about delaying fund raising until she has some data and a business model.

The main warning i wanted to give her was that if she allocated to funding she got poorly, she’d find the investment actually working against her, it would actually make things harder for her.

What made me say this was that she had intended on allocated 2/5 of the funds raised to G&A and Staff, and whilst this isn’t wrong, it meant that to get the required traction the remaining 3/5 of the funds would need to work extra hard.

in simple terms, for $100, $40 would be spent on things that wouldn’t grow the business, if the business had to double i.e. make $100 become $200 in a year, then the $60 allocated to marketing would need to work 3x as hard. and thats assuming that the $60 allocated was efficiently generating a return from the outset.

The points i was making to this founder were –

  1. try to minimise the amount of fund-raising you need at this early stage.
  2. if you’re going to take funding, try to minimise how much of the funding gets put towards G&A, aim to focus as much of it on traction and growth as possible.
  3. before you think about the funding, make sure you have a business model that maps out the unit economics and gives you an idea (preferably with verified data) of what kind of growth costs and returns to expect, and use this as a basis for allocating invested funds.
  4. try to get at least some traction before you start fund raising, firstly it’ll help with the fund raising, and secondly it’ll give you some data to fill out your model and verify your assumptions.

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