When raising venture capital, the key question to ask yourself is: Will you grow faster with that money than without it?
Most entrepreneurs never really think of raising capital.
Those who do mostly ask questions like: - How do I find investors? - Will they like my startup? - What should I say in my pitch? - What valuation should I target?
Those are good questions. But most of the time when I meet founders who ask them, I ask back the one that’s much more important:
Do you know how to spend that money?
This question is not as simple as it seems.
Venture capital is worth raising only if that money buys you a lot of speed.
And that happens in one of these 3 scenarios:
1. You have good economics (profitable or close to it), and you can buy a lot of new users or customers to grow faster.
2. Remove a bottleneck. There’s some limitation in your product, processes, or workforce that affects your growth. You can invest in product development or infrastructure or hire more people to overcome this limitation and grow faster.
3. Survival. You lose money, don’t know how to grow, but you have ideas. You raise money in hopes that one of these ideas will work and your business will start growing.
VCs quite like the first scenario, sometimes are willing to invest in the second, but rarely in the last.
Most entrepreneurs, however, live in the fourth scenario. They don’t know where to buy a lot of new customers, they don’t have a strong plan to overcome a limitation that’ll unblock growth, and they don’t even have a lot of specific ideas about potential growth points and strategies.
They don’t know how to spend a lot of money in such a way that it’ll boost growth.