David Cummings on Startups

Benefits of Raising Outside Capital

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David Cummings

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At Pardot we chose to not raise outside capital and experienced the Benefits of Not Raising Outside Capital. With that said, I’m on the board of several fast-growing startups like SalesLoft and Terminus, so I’ve had the chance to see the other side. Not raising capital — if you can do without it — does make things easier overall, however it also makes it significantly harder to “win” the market.

Here are a few benefits of raising outside capital:

  • Grow Faster – The number one reason entrepreneurs want to raise capital is that they see a chance to grow faster. Sometimes this is taking a model that’s already working and significantly expanding it. Sometimes this is investing ahead of expected revenue such that there’s an opportunity to scale faster and more efficiently. Regardless, growth is at the core of raising money.
  • Helpful Board of Directors – A board is more work and structure but brings with it a good rhythm of planning and review at a high level. VCs are usually on 6-10 other boards so they can bring best practices and recommendations from experiences across a variety of startups. Boards provide entrepreneurs with help and guidance in scaling the business.
  • Gain Marketshare – For most venture-backed tech startups, the game is to gain as much marketshare, and corresponding revenue, as fast as possible to either become a target for an acquisition or go public. While markets are rarely winner-take-all, they very much place a high reward on being the top three.
  • Great Expectations – Once you raise money the clock starts ticking to generate a return on investment. This is motivating for many entrepreneurs and helps them focus on building a large, valuable business. Entrepreneurs are often ADHD such that outside investors can be helpful as a forcing function on the desired target.

Raising outside capital should not be the goal for the majority of entrepreneurs. Only in rare circumstances should capital be pursued and these are a few of the benefits that come along with it.

What else? What are some more benefits of raising outside capital?

Comments

5 responses to “Benefits of Raising Outside Capital”

  1. Brad Banyas (@BradBanyas) Avatar
    Brad Banyas (@BradBanyas)

    Entrepreneurs are often ADHD! I think this is a requirement for starting a business. I tell everyone it is a skill not a detriment:)

    Reply
  2. Rob Frohwein Avatar
    Rob Frohwein

    I’d add a few more items to the benefits:

    (1) the process of raising money, though grueling, is incredibly educational. You learn about strengths and weaknesses of your model and learn how to respond to objections.

    (2) you meet investors in many of the up and coming companies globally and can reach out to them for contacts into these companies in the event you’d like to partner with any of them.

    (3) you become expert at pitching your company to very smart investors (and occasionally not so smart investors) – this is a very helpful skill as you grow and need to educate others about your business (research analysts, investment bankers, etc.).

    Reply
  3. Enon Avatar
    Enon

    Anybody thinking of raising capital from VCs should read Paul Grahams essays on the topic. That goes triple if you don’t know who Paul Graham is.

    http://www.paulgraham.com/articles.html
    Some relevant ones:
    How to Raise Money
    Investor Herd Dynamics
    How to Convince Investors
    The Equity Equation
    The Hacker’s Guide to Investors
    How to Present to Investors
    How to Fund a Startup
    The Venture Capital Squeeze
    A Unified Theory of VC Suckage

    no… actually, just read all his essays. It will only take a few hours.

    Reply
  4. Barry Sharf (@barry_sharf) Avatar
    Barry Sharf (@barry_sharf)

    I learned a lot about the benefits of raising outside capital by reading this article. I’m Barry Sharf, an entrepreneur, active investor and operator from NY, USA. Keep continue!

    Reply
  5. Dave Anderson Avatar
    Dave Anderson

    That is a good tip that raising outside capital shouldn’t be the goal for the majority. It would be good for entrepreneurs to do some capital raising for themselves. That is something that I would want to do if I were an entrepreneur. http://lenoxgroupllc.com/services/capital-raising

    Reply

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