Rule #2 – No, you don’t need to raise money right now

There is a tendency, especially in tech startups, to believe that adding someone else’s money in to the equation early on will help solve a number of the problems you’re bound to face. Better to be safe then sorry, they say. Angels, VCs, Banks, SBAs, etc. Someone, somewhere is bound to have some cash that can help move your baby from infant to All-Star.

Nothing could be further from the truth. Raising money rarely solves ANY problems, including the ones created by having money in the bank. More specifically, when money is introduced in to things, the temptation to spend money follows shortly thereafter. At this point it’s easy to say, “that would never happen. I’m way too responsible for that!” No doubt you are. Unfortunately, you’re far too naive at this early stage of the game to see the potholes on the road ahead.

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The first thing my partners and I did once we began raising money was establish an office (location), an 800# and 2 phone lines (communication), and purchase some business cards (marketing/more fundraising). We optimistically thought that not only would our product be up and running in no time, but we thought we needed every last one of these things to create a presence and validity to what we were doing with interested parties, customers, current investors and future investing prospects. The only other money we had spent was on registering 4 different versions of the URL we were going to go with. (2 .coms and 2. nets)

The Office: Our office is extremely well-priced for a metro area. We’re 1 block from one of Austin’s busiest intersections and all the utilities are paid. We have 24 hour access and a balcony. Our rent is $250 for 400 square feet, which is a steal of a deal. It’s also $250 a month for something that was not nearly as needed as we thought when we eagerly signed a two year lease.

In hindsight, we should have given greater consideration to the fact that most of the work building our site/product would be done at our programmer’s house since that’s where he was most comfortable and our resources were housed. We also were doing most of our work after 5pm since we all had day jobs. As a result, we usually wanted to meet somewhere to work where there was a reasonable expectation of food, i.e., someone’s house. Our wonderful, affordable, conveniently located office sat empty often for weeks at a time since we had other jobs that kept us away by day, and other comforts that kept us away at night.

If you are tempted to get an office, I suggest writing down 10 things that you need the office for. Not “want” the office for, but “need” the office for. Are you sure you can’t meet with clients at their office or in a public location? Is there not enough space in your living room for everyone to crowd around the same table to work? Oddpost was started using Wi-Fi in coffee shops. Google was put together in a garage. Startups have long thrived in spare bedrooms, college dorms, etc. Get it through your head: office space is a luxury you should fight to avoid for as long as possible. It is the expense that often costs the most money while also being the expense that, with a little ingenuity, can most easily be done without.

The Phones: We set up two VOIP lines and an 800# early on in the process to make sure potential customers, clients, investors, etc. could reach us. What we didn’t take in to account was that (a) virtually no one knew our number and (b) everyone who would be calling us would likely have our personal cell phone numbers. We convinced ourselves that the time to get the phones set up (about a week) would be an unbelievable burden if our product was ready to go and we had no phones. Oh the horror! So, we set up our phone lines to make sure this didn’t happen. Whew. In the first year they were installed, we had exactly 4 calls come in on the 800# and every call we used the local numbers for could have just as easily been made on a personal cell phone.

Business Cards: We designed some snazy business cards before going to our first trade show and ordered a set for each of our three founders. We got the glossy kind that were sure to make a good impression. When we got to the show, we found that most of the attendees were simply entering each other’s contact info in to their phones or PDAs. In the event an actual card was exchanged, even the highly visible, well-established, profitable companies were using business cards of the “Free” variety that can be found at VistaPrint and countless other websites. This experience led me to create my own “Business Card Rule of Business”. Don’t pay for something if someone will give it to you for free. Ever.

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It would be easy to look at these three examples, sneer, and say, “that isn’t a tendency of startups. Those are isolated bad decisions by YOU.” I tend to agree. Unfortunately, none of the decisions listed above was made with anything but the best of intentions, which is why they’ll look a lot like the bad decisions other startups make early on without a proper understanding of capital resources. We thought by being extremely price aware, we were doing the right thing. We went with the least expensive office, the most reasonably priced phone service, and ordered the fewest business cards possible.

What we failed to consider was whether or not the motivations that led to these decisions were based on solid logic. We thought of all the things we could do with the office without realizing we could do those things in the homes we already had without it being a big deal. We thought of all the uses of phone lines in a business without realizing our need for company-specific phone lines would only exist once we had launched our company. We thought of the need for classy looking business cards without thinking about whether or not our audience of tech co-horts was likely to respond to such a thing and what long-term value that response would have.

Looking back on three years of expenses, including those above, I am heartbreaken at how much precious capital we spent in places where we should have saved it. The part that pains me is the fact that there is nary an extraneous purchase on the ledger. EVERY penny spent was with the intention of furthering our business towards a successful state and yet much of it looks wasted in hindsight because we simlply were spending for a future that hadn’t yet been determined.

I’m advocating an avoidance of fundraising early on based on the fact that with no money in the bank, you literally have no money to waste. Yes, you could raise money and convince yourself that you are responsible and each decision would be well made. You could have advisors and accountants and seek counsel from people who’ve been down this road before about the best way to horde your money and only spend it when ABSOLUTELY necessary.

My point is that all the failsafes and considerations in the world won’t be enough to keep you from making some very foolish decisions with your capital because you simply can not know, as you are building your business, what expenses will be worthwhile in the long run and which will be wasteful. By resisiting capital early on, you have the chance and the choice to avoid having to make those decisions all together, so when you DO truly need to raise money, you’ll have a specific idea of where to use it because you’ll already be a lot further down the line in your businesses development.

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One Response

  1. Yes this is a rule that is 100% exact concerning me.
    I cried and cried for 2 years to have some investors.
    So I worked home alone, With my laptop.
    Ok : I was a bit isolated so I also worked in cafes with wireless hotspot.

    But I am glad today to have “not succedeed”. I finnally got my program working but ….. but in the mean time the world has 95% moved in my business (3D) .
    ==> A dollar spent 2 years ago would have been 95% sure a waste.

    “Do not raise money yet”:
    Really a very difficult rule to leave with it as one entrepreneur :you feel all but Not safe.
    But at the end a Killer rule.

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