Why do startups wear their capital raises like a badge of honour?

Yesterday I was reading an invitation to an event for startups.  It looked like a great event.  The company running the event apparently runs these regularly as, on the bottom of the invitation, they mentioned previous presenters they have featured.

It went something like this – “Joe Bloggs, raised $XM,  Fred Nurk, raised $XM, Jane Smith raised $XM”.  That got me thinking.

It seems to me that the measure of “success”, in the startup community anyway, is not the number of customers you have, not the turnover you have, but the funds you’ve raised.  Call me cynical, but since when is this true validation of a successful business?

I question whether some of these businesses are just drinking their own Kool Aid, caught up in the hype of startup world where the more you raise the bigger the hero you are.  You’re paraded around on startup stages about your superhero status, without anyone looking behind to see if you have a viable – or sustainable business – and possibly giving other starry-eyed startups the idea that you don’t have to have a solid business, you just need to be able to raise money – over and over again.

I saw this Kool-aid drinking in person several years ago on my first trip to Silicon Valley.  My Co-Founder, Alli and I, had just won our first ever pitching competition (before it, we didn’t even know what a pitch was) and the prize was a trip to TiECon in Santa Clara.

At one of the sessions, a gentleman named Rick Morini was being hailed as a god after steering his early stage startup through raising around $50M US (in three rounds) and using that to acquire 300M users.  His company, Branchout, was a job-finding platform that mined Facebook for jobs and job referrals by going through your friend network.  He proudly told a captive audience that he’d done 3 rounds after pivoting from a “sports fan” business, for which he’d also raised money.  (Um, for the record, that’s not a pivot, that’s a whole new business.)

Mr. Morini was being celebrated as a wunderkind after these massive raises and was talking about his unbelievable growth.  Duly impressed, Alli and I came back and started doing some research into Branchout and found a stack of forums with disgruntled users who were fed up with their Facebook contacts being “invaded” and wanting to know how to get out of Branchout.  Within a month, this business had lost half its users and the pundits were predicted that, at that rate, it could be defunct before the end of the year.

Branchout “pivoted” again and again but it just didn’t last and, just recently, it’s dev team and database was sold off leaving investors with a substantial deficit and proving that raising funds is not a measure of your success.

But that’s just one of hundreds of examples.  In thinking about this article, I did a whole lot of research into failed startups and the figures are staggering.  They parallel the well-known ABS statistic that states that around 90% of all businesses fail.  The difference is that a lot of startups fail with a lot of other people’s money.   And there’s plenty of local examples of big raises that have gone sour – we just don’t parade them on stage (although, interestingly, we did when they raised).

An article on TechCrunch gives this good example and quotes, “It’s also possible to raise too much money. Inexperienced executive teams sign up some customers, raise a big round and get a little out of control with high-priced office space and Google-esque perks. Then, for whatever reason, growth slows and all that capital quickly disappears.”  They cite the example of Ben Yoskovitz, the founder of Standout Jobs (interestingly another company in our space) and a postmortem written in 2010 by CB Insights. “I raised too much money, too early for StandoutJobs (~$1.8M). We didn’t have the validation needed to justify raising the money we did.”  He went on to say that “raising money felt like winning.”

That kind of media is, however, all too rare.  Rather than looking to set examples of businesses who’ve found a great product/market fit (the backbone of every successful business) or those who’ve gained great sales traction, or customers of a great calibre, we make heroes of those who’ve raised money.  Why is that?

Why are startup events full of “how to raise money” and “how to pitch” sessions instead of “how to grow a business” sessions or sessions on building killer – and in-demand – technology?   It appears we’d all rather hear sessions about Uber’s or Airbnb’s latest $500M round or how Pinterest or LinkedIn had raised millions – well before they had any revenue model.  The message is apparently – “don’t worry about revenue, they didn’t”.  Newsflash – “they” are the the exceptions rather than the rules!

Maybe it’s my business background but, to me, there just might be a lot of startup Kool Aid drinkers who are going to fall on their own swords.

We all hear questions about whether or not we’re in another “tech bubble”, whether all this money-throwing at startups is going to end in a bad way.  In my humble opinion, it might.  It could just take one or two big, bad stories to end sadly and this fantasyland we all currently live in, may also end.

My problem is not with raising money.  My problem is that we seem to define success with how much you’ve raised – and yet that, on its own, is no definition of success.

Yes, we have raised money – and we’re very aware of our obligations to the investors who have staked so much faith in supporting us in that way – but we certainly don’t pin our success to the value of our investment.  We try to reward our investors with revenue and customers and building great (and valuable) technology.

Would a $50M investment help?  Absolutely!  Would it make us superstars?   No, not just by raising the capital.  However, if we could take that capital and turn it into significant (and I mean 8, 9 or 10 figure) annual revenue, user traction, an enviable client base and long-term sustainability, then yes it would.

But then, I guess I’m old school.

NB: The opinions in this article are the author’s only.

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Why do startups wear their capital raises like a badge of honour?

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