My initial comment threw them a bit off.
I said: “Congratulations – you’ve just decreased your chances of success to about 10 percent”.
I am sure this was not the answer they were hoping for, but if you look at the statistics this is nevertheless the truth.
When you sign up with an investor you have to remember that investors expect to have one or two really big successes in an entire fund.
The remaining investments will – at best – pay back the investment or go bankrupt.
The sad story is that in Europe around 45 percent of all capital in a venture fund ends up in companies not paying a dime back to the investors. And when you look at it this way, you could say that raising money basically increases your venture’s risk of failing.
There is a very logical explanation to this.
Getting money onboard usually means that you are expected to do more and faster, so you start hiring new people which increases your burn rate significantly. But if your results in terms of customers and revenue do not follow your expectations, it will take time to slow down and you run out of cash with little chance to get to a lower burn rate. In most cases your investor will also be pressuring you to maintain the burn rate and just perform better.
There is a tendency to focus a lot on raising money and getting investments onboard. But remember that money is not the goal in itself – it is the means to an end, whether that is developing your product, increasing marketing, sales activities, etc. There are other ways to get all of those things.
Before a startup gets an investment they do a lot of things: Assemble a founders team, build a first version of the product, get the first customers onboard, etc. And most companies can get to the next level by doing the same – get commitments from people who think the company or product is exciting and wants to add a bit of resources, first customers willing to pay upfront, etc. And these commitments are usually of much higher value than money in itself because they drive learning, insight and understanding.
I am not saying that you should never go for the money – I am only saying that you should think of your startup as series of small experiments that you are testing. Experiments that will either be successful or not and experiments that you can abandon if they turn out to be less promising than expected. Experiments that can be abandoned fast which will get you back to a lower burn rate and get you ready for the next set of experiments.
Do not bet all of your money on one strategy but think of your startup as series of options that you can pursue with little knowledge as to which of them will be the right one. And reserve cash for the next experiment and the next learning cycle.
In my mind startups do not fail due to lack of cash but lack of learning and lack of speed in learning. Not all your experiments will be successful but if they increase your learning and understanding on what to do next, they have increased the value of your company because risk has been reduced.
I know it is hard to convince an investor that you would like one million and that you will spend it on designing experiments and obtaining learning in order to deliver the promised results. On the other hand it is so much more credible to talk about your assumptions, how you will test them and what you will do next if the results are not as expected. The smart investors will get that.
And always remember: In Europe only 17 percent of all fast growing companies are based on venture capital.