Entrepreneur Office Hours - Issue #41
What you don't know can and will kill your startup
When I was in my early 20s and starting my first company, I thought I knew everything I needed to know about building my business. Or, if I didn’t know something, I was sure I’d be smart enough to figure it out quickly.
Obviously, I was an idiot who didn’t really know anything, and that first company failed.
Fast forward 15 years, and, if I’m being honest, not much has changed. The only difference between the 20-something version of myself and the almost 40-year-old version of myself is that these days I realize I’m an idiot who doesn’t know anything.
The good news is… so are you!
I swear I mean that in the nicest way possible. None of us know nearly as much as we think we know, and that’s the common theme across this week’s articles. They all explore different ways of figuring out the critical information you’ll need to know if you want any hope of building a successful company.
The list is A LOT longer than you think, and this article is by no means exhaustive. But it’s a good place to get started.
The Executive Who Invented the Banner Ad
Whether you love Internet advertising or hate it, you're going to enjoy this episode of Web Masters featuring Bruce Judson, the man who invented banner ads while running new media for Time Warner in the early 1990s.
Listen to Bruce’s story now on:
…or search “Web Masters” wherever you listen to your favorite podcasts.
What if there was a way to get potential customers telling you everything you need to know in order to sell to them?
There is! And it's a lot easier than you think.
While bad entrepreneurs focus on how much money their companies can make, good entrepreneurs are obsessed with something else.
Office Hours Q&A
Love all your great fundraising posts. But I have a question. In lots of your articles you talk about how pre-revenue startups shouldn’t be trying to raise money. But I see it happen all the time. Is it really such a bad thing? And, if so, why?
ot’s to cover here. Let’s tackle the issues one at a time:
Issue #1: Just because something is possible doesn’t make it a good idea. For example, it’s technically possible for me to eat nothing but pizza and ice cream, but I don’t do it because I know it will lead to big problems later in lfe. The same is true for fundraising too early. It’s possible, but it can also be fatal. Too much money too early often leads to systemic inefficiency and bad decision making. Are you a mature enough entrepreneur to know how to handle having lots of money in your bank account before having a viable business model?
Issue #2: Yes, pre-revenue startups raise capital all the time, but the vast majority of those pre-revenue startups are being led by experienced founders. They’re the entrepreneurs I allude to above… the ones who are mature enough to know how to handle having lots of money before having a viable business model. Well… some of them are. Plenty still screw it up, and that’s why their second company doesn’t work out as well as their first.
Issue #3: To be fair, usually what I’m telling entrepreneurs is that they shouldn’t raise venture capital pre-revenue. But VC money isn’t the only type of investment capital. I raised money for my pre-revenue companies from angels. The funding was modest, and it was mostly to cover our minimal startup costs while helping the early team pay their bills each month so we could all focus on building the company. For example, the first money my company raised was $50k from a friend. In other words, it was hardly a glut of money, and there wasn’t a lot of risk of us abusing it. In fact, we were incredibly stingy with that money. I think it lasted three of us more than 12 months, which comes out to less than $1,400 per person, per month. Also, not everything went to salaries. So… yeah… those were some lean times.
Issue #4: Don’t forget that the earlier you take money, the less leverage you have with investors, and the worse the deal you’re going to get. There’s a huge difference in valuations between pre/early revenue companies and companies taking VC in order to scale. The super early companies are going to give up ~25% (or more) of their companies for a few hundred thousand dollars… maybe a million bucks if they’re lucky. The later stage businesses will sell much less of their companies and/or bring in significantly more capital.
Issue #5: Much to the frustration of my students, I rarely make definitive, all-encompassing, absolute statements about anything entrepreneurship-related. The same is true when it comes to the best time for fundraising. Every company is different. Some companies genuinely need capital before they can ever sell a thing (e.g. medical devices and pharmaceutical companies). Your company might be one of those exceptions. The best person to answer that question is you. And the fact that you’re reading articles about fundraising is great because it means you’re already better informed than most people. So keep it up!
Got startup questions of your own? Reply to this email with whatever you want to know, and I’ll do my best to answer!