Startups' number one rule: Don't raise money

Startups' number one rule: Don't raise money

Summary: Contrary to what seems like the lifeblood for startups, a number of investors have said that entrepreneurs should avoid raising funding for their idea, unless it's unavoidable.

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The strategy of funding a startup could be as simple as getting as much investment as possible, but in the face of warnings issued by entrepreneurs themselves, investors are also warning against raising money.

Angel Investor John Tan told an audience of entrepreneurs at Echelon Ignite Australia in Sydney on Wednesday morning that contrary to his interests as an investor, the number one rule startups should follow is not to raise money unless they really had to.

"Avoid the temptation of raising more than you need. When you have not a lot of money, I think you're more disciplined in how you spend your money. You know you can't just spend hundreds of thousands of dollars on Facebook or Google AdWords, so you actually focus on your users."

Tan said that there was something positive that could be said about a company that could really bootstrap itself and grow organically, as opposed to one that needs to rely on investor interest to survive.

Pollenizer's Phil Morle agreed to an extent, but acknowledged that for some startups, that fund of money was necessary.

"If you do need to raise money, raise as much as you can, and then when you've raised as much as you can, don't spend it," he said.

Morle added that he often sees startups spending 90 percent of their time raising money, when that time could have been better spent focusing on their product and building out the features that their customers actually want.

Similarly, Anthony Liem, the CEO of Indonesian-based incubator Merah Putih, said that this was part of the reason why he only hands out smaller segments of funding.

"I don't believe in a huge fund," he said, adding that initially, he only made investments of $250,000 to start with. "If they show real progress, we add more money."

Liem added that funding is really a necessary evil.

From the corporate venture capitalist side, however, SingTel Innov8 CEO Edgar Hardless said that there is so much money available in Singapore that he questioned any founder's inability to find funding.

"If I get somebody who comes to me in Singapore, and they're struggling to raise $250,000, I actually sometimes don't rate them as an entrepreneur because there's literally so much money available," he said.

"It questions the entrepreneur's ability to really understand what they're trying to do," he said.

He said that with the amount of new funding in the region, more Australians should be looking at Singapore rather than the US as the next logical step.

While the funding situation might be improving, the issue of providing support for startups is still a significant issue.

Morle said that the main difference between South-East Asia and Silicon Valley is that there is no self-sustaining ecosystem, and that unlike US incubators and accelerators in the US, startups can't simply go through a program for 3 months with the expectation that they'll receive funding.

Tan pointed to the example of Flightcar, which after graduating from Y Combinator, secured Series A funding of US$5.5 million within two weeks.

"That's not going to happen here. My advice to startups is — you have to be realistic about your valuation for pre-seed and your seed round. The higher your valuation is, the harder it is to justify that increase in valuation when you want to do a Series A," Tan said.

Supporting startups in the region from cradle to grave to make sure they don't die after falling off an accelerator program has been recognised by organisations like Pollenizer, but getting involved with such groups is not necessarily about having a killer idea.

Liem said that it's all about the people behind the idea, and that he expected a good startup to have two founders — one of which must be able to code.

"If you have some brilliant business founder in this space, we will [tell] him, 'If we just hire engineers, we could do the same thing as well'."

Morle agreed, saying that they really looked for founders that really had their stuff together.

"You want to see that they have direction, and know where they're heading. Personally, I like to see a sense of revenue model pretty quickly. I want to see a matchup between the person who says they can do something and the doing something — that that person can deliver," he said.

"We're in there to the death. That's the big difference. We're not a three-month accelerator where we throw you out on pitch date. When we decide to co-found business with other people, we are co-founders in the business, and we're in until it goes down in flames or it's a successful company."

Topics: Start-Ups, Singapore, Australia

Michael Lee

About Michael Lee

A Sydney, Australia-based journalist, Michael Lee covers a gamut of news in the technology space including information security, state Government initiatives, and local startups.

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2 comments
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  • The Distraction of Funding

    We have found that the quest for funding can be an incredible drain on time, resources, and mental energy. After spending months honing, building, refining, and making pitches, we realized that the development of our product was beginning to suffer - not to mention our revenue stream. I would say that for us, close to 80 percent of our time and energy was focused on getting funding. Our solution was to self-fund by taking on select consulting jobs. These jobs have been the revenue engine for our product until it gets full traction. Since we made this pivot in January, we've seen a complete turn-around in terms of cash-flow and product development. An added bonus has been that the consulting work has often led to our customers buying our product.
    dave_storyandstructure
  • Not needed, but it can help speed things up if you have focus

    Great article. I find that if you have enough patience, then indeed, raising capital is not necessary, well not if you have the right motivations. You can outsource tasks and build your dreams on a tight budget, or if you have even more then you can learn the skills, but that can be hard if you're working across a number of sectors as change happens rapidly in this tech age.

    For instance I have managed to work with someone using Odesk, and while it can be challenging at times and requires a fair amount of tolerance due to differences in thought patterns lol, I've managed to develop a proof of concept for a world changing web portal on $5.2k + me.

    You can see the Alpha release of this web portal at www.freewill.im which has the Share distribution tech for it to be equally owned and some other bits and bobs like profile creation, with the Beta nearing completion with the ability to share time, create dreams, provide/receive feedback, bid for fair access to offerings etc :D.

    Now I'm happy to focus my energy towards developing it rather than raising funds, as I have other businesses that require my attention also and from which I can fund it, and then there's always the bank if I decide to play that card lol. Still, I wouldn't turn away financial support and still keep a hand extended through platform like Indigo/Kickstarter/Angel.co, as it's undeniable that if you have a focused plan, money can help speed up its execution at this time when it has such influence, by providing access to more human power.
    FreewillNinja