Founder Questions: When Should I Not Raise Capital?
Spencer Rascoff is an entrepreneur and company leader who co-founded Zillow, Hotwire and dot.LA, and who served as Zillow's CEO for a decade. He is currently executive chairman of dot.LA and a board member at Zillow and TripAdvisor. In fall 2019, Spencer was a Visiting Executive Professor at Harvard Business School where he co-taught the "Managing Tech Ventures" course. In 2015, Spencer co-wrote and published his first book, the New York Times' Best Seller "Zillow Talk: Rewriting the Rules of Real Estate." Spencer is the host of "Office Hours," a monthly podcast on dot.LA featuring candid conversations between prominent executives on leadership, diversity and inclusion, and startups.
Sometimes it's better not to raise money. I know this sounds strange coming from me. I'm an angel investor in over 50 startups, my Twitter is essentially a ticker for funding news and I've always been a huge proponent for going public, which requires a long road of investments along the way. But there are great reasons to turn down venture capital investment and bootstrap it yourself or take just a small amount of funding. This was the crux of my discussion the other day with a founder facing this big decision on whether to raise a seed round.
This founder's company is getting great customer traction within a niche of a skyrocketing industry that has some very powerful players. He's at a fork in the road. If he pursues funding, he'll likely be able to raise a round. But is it the right thing?
Here are three reasons I gave him to consider abstaining from raising:
1. You Can Stay Small and Stay Focused
Without investors, you can continue to focus on the niche problem or gap that inspired you to start the company, become the best in the world at solving that particular problem and develop a loyal user base.
With investors, you are pressured to swing for the fences and will have the cash to do so. Investors expect returns, and that means going big. In this startup's case, it would mean going horizontal with its product offering and taking on the established players across many service lines. It will be much harder to win horizontally against giants than it is to win vertically in a niche. True, the size of the prize is much larger horizontally, but the probability of winning is smaller.
2. You Have a Higher Probability of a Better Exit
Without investors, you have the option to sell to a bigger company as your offering gains traction, gets noticed and grows in value. You can do very well in these exits with M&A (merger and acquisition) values between $2 million and $50 million. That would be especially true if you've avoided dilution from investors. As soon as you take money from investors, you have to go big, and that means a sale of less than $50 million is not a "win" anymore.
With investors, the floor for a favorable exit is much higher because your venture capitalists won't let you take any less than the funding round or the prior valuation. Plus, you have more stacked against you when it comes to a favorable exit: You will be diluted from your initial round and future rounds, meaning that you will own less of the company because you've sold portions of it to venture capital investors in each funding round. As a founder, you need to probability-weight and risk-adjust your exit strategy.
3. You Have More Control of Your Journey
The third point about abstaining from capital isn't so much about the financial picture but about the experience. Being an entrepreneur is about so much more than the money — it's an all-consuming and incredibly fulfilling endeavor full of problem-solving and hard decisions.
And the way you handle those problems and decisions is fundamentally different if investors are in the picture.
Without investors, the latitude to do your own thing is huge. You have a smaller footprint because of limited resources but are free to move at your own pace and accountable only to yourself and your customers for your decisions. In other words, you can grow slowly and comfortably.
With investors, your hair is on fire. You have more opportunity and resources, but also more pressure, accelerated timelines and accountability to people who aren't in your everyday operations.
Ultimately, choosing whether to go the funding route requires you to be honest with yourself. What do you want to get out of your experience? Some people just want to build a tidy business for a good profit, sell and then take on a new challenge. Others want to build the next Google. You can't do the latter without investors, but you can do the former. Ask yourself what you want, and be open to reevaluating as your company grows. There are lots of middle lanes, too; when it comes to startup funding, one size does not fit all. Just remember that your funding decisions frequently dictate your product strategy, business strategy and exit strategy.
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Minutes into filling out my absentee ballot last week, I was momentarily distracted by my dog Seamus. A moment later, I realized in horror that I was filling in the wrong bubble — accidentally voting "no" on a ballot measure that I meant to vote "yes" on.
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My distractingly sweet dog, Seamus.
Photo by Tami Abdollah
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