By David Kolodny
There was no more investment capital available to the entrepreneurs. In the first half of 2021, startups raised $288 billion in project financing, breaking the record set in 2020 by nearly $110 billion. Private companies with a valuation of over $1 billion were originally called “unicorns” because they were so rare; Thanks to generous funding, there are now about 1,000 rhinos at last count.
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If venture financing is so widely available, shouldn’t you raise a round? Shouldn’t you win as much as you can, as soon as possible?
not necessarily. Venture financing is a clickbait in the tech world. Funding ads saturate news feeds, urging founders to believe that venture capital is the only way to grow and succeed.
This obsession with finance can lead founders to make decisions that are not in the best interests of their employees, customers, and shareholders. Raising capital is not an achievement – it is a commitment you make to your investors.
When co-founder Phil Santoro left Google to launch Wilbur Labs, a startup studio, we turned down funding offers even though it made building our company more difficult in the short term.
We’ve been working on an elephant sofa for six months and prioritized revenue from the start. For many companies, including ours, financing can create more problems than it’s worth.
Venture companies raise capital from limited partners who expect large returns within a certain number of years. Founders who bring in venture capital inevitably get better for project-wide valuations and lose flexibility in thinking and executing over the long term. They lighten their ownership and often commit to growing faster than they actually can.
To be clear, funding isn’t bad, and sometimes project funding is critical. If you are building a self-driving car company, you will need significant financing, likely from venture capitalists with a high risk tolerance.
However, countless companies that raise venture capital do not need it. Even when startups raise money, they often fail because building a company is more than financing.
Before you trade equity, independence of capital, legality, and connections, consider some alternatives.
First, focus on business planning and getting customers to vote using their wallets. “Revenue solves all known issues,” said Eric Schmidt, Google’s former Chairman and CEO.
On the other hand, finance may solve your problems today but create new ones tomorrow.
Second, if you need financing, consider all the options available. While project funding dominates the headlines, fundraising is not a one-size-fits-all endeavor. For example, Wilbur Labs offers undiluted capital to our portfolio companies that reach certain milestones, which results in fewer meetings, less founder and employee dilution, and fewer distractions for the management team.
Consider non-dilutive options such as a term loan, line of credit, or revenue-based financing. Although they don’t make the headlines, they protect your ownership, increase your independence, and are often the most appropriate financing options available for your organization.
Third, remember that venture capital does not have a monopoly on credibility or relationships with employees, partners, and potential clients. Strategic advisors, for example, can provide guidance and communication of equal value without taking over a large portion of your company.
When financing seems to be your only option left, work backwards from your goals. “If you had an additional $10 million in funding, what would you do?” It is the wrong question.
A better question is: “If you wanted to grow faster, what would that look like? How much capital do you need (if any), and what is the best source for it?”
Funding rounds create a lot of noise. If you can drown out that and focus on what’s best for your business, you’ll solve bigger problems than the average founder.
David Kolodny is the co-founder of Wilbur Labs, a start-up studio based in San Francisco that identifies significant customer weaknesses and builds businesses to solve these problems. Since 2016, the studio has built and invested 15 tech companies, including VacationRenter, Vitabox, Joblist, and Barkbus. Prior to creating Wilbur Labs, Kolodny was a product specialist on the Customer Solutions & Innovations team at Google.
Illustration: Dom Guzman
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