To raise or not to raise.

Recent discussions with a serial entrepreneur got me thinking about fundraising. The entrepreneur’s previous startup raised multiple rounds. The product was doing great, showing strong product-market fit with good, large customers and growing well. Fundraising was obvious, and flush with cash, they set out to deploy it. Armies were raised, and everyone rose up the ranks overnight.

However, in the whirlwind of scaling up, the co-founders gradually lost touch with their customers. Layers of management came between them and the end-users, and the initial customer focus began to blur. This drift happened so subtly that it went unnoticed until it was too late. Fast forward a couple of years, and what once looked like a rocket ship ready for takeoff had turned into a truck stuck in the mud.

Now on her next startup, the entrepreneur is extremely wary of raising funding. She avoids conversations with venture capitalists and concentrates solely on serving her customers and generating revenue directly from them. This book, though, is still to be written.

Every startup eventually faces the dilemma of whether to raise funds. While raising capital can provide the resources needed for growth, it often diverts focus both during the fundraising process and afterwards. The emphasis shifts from customer engagement to how best to deploy the new capital.

My thoughts are that raising funds for a startup is like fighting with a double-edged sword: A double-edged sword can kill the person who wields it, but in the hands of a samurai warrior, it can kill two in a single stroke. The best thing about raising funds is that it helps you gain focus and concentrate on scaling —provided you know how to allocate those funds wisely. Conversely, the biggest downside is that it can cause you to lose focus, especially for first-time entrepreneurs who may raise too much capital too early.

Much has been written about lean startups and achieving product-market fit in a capital-efficient manner. Capital efficiency is indeed a noble goal and arguably should be pursued from the outset, as it's challenging to rectify inefficiencies later. However, there is an equal case for a fat startup, which Ben Horowitz has put up brilliantly here.

As for most other things in startup land, I suspect there is really no rule. The merits of fat vs. lean startups must be debated in the context of the business in question.

With money in the bank, it becomes all too easy to spend money (and consequently time) on things that do not result in long-term sustainable growth. Startups become fat, and when the money runs out, they come crashing down into the valley of death. On the other hand, money in the bank could be a significant competitive advantage. Especially for startups that have figured out their product-market fit, the extra cash helps them preempt future revenue streams and scale quickly.

The takeaway may be that if you are a first-time entrepreneur, try to bootstrap to achieve product-market fit. However, in case your startup does require you to raise funds, get a good advisor (read: experienced entrepreneur) to help you deploy funds in a way that helps you maintain focus.

The entrepreneur and I both agreed that funding should be exercised cautiously. A practical approach might be to use capital not to 'push' the business forward but to respond more effectively to customer 'pull'. However, this concept warrants further deliberation and is probably a topic for another post.