I seem to spend a lot of time convincing people not to raise money. The #1 culprit is not The Downturn or a lack of good ideas. The real problem is that people are trying to raise money too early when things are still half-baked.
Here is my top 10 list of tough questions all entrepreneurs should ask themselves before trying to raise money:
- Is your idea ready? – Most ideas need time, not money. E.g. time to really vet ideas, get outside feedback, and do a deep dive into everything. Money won’t help you do this faster and will be a distraction.
- Are YOU ready? – Anyone can, and should, start a business, but you should be honest about your personal timing. Can you afford to take a pay cut and work long hours at this stage in your life? Have you built up some relevant career experience to help you? Do you have good general management skills? What can you do to develop your own skills?
- Do you have a good network? – It is so much easier to build a company when you have a good network to support it. Networking is free and fun and you’ll hone those skills you’ll need when you are building your own company. Don’t like networking? Don’t start a company!
- Do you have big gaps in your team? – Don’t try to raise money when you have a technical product with no engineer on board. Build your core team first. Hint: don’t do it alone, ever!
- Do you understand the fundraising game? – There is no excuse to be under-educated about the fundraising game. Everything is available on the Web and many funders blog about their deals. Don’t wait until you start pitching to learn what a term sheet is or what valuation to expect.
- Do you know your target customer intimately? – Don’t just talk about customers as if they are an abstract concept. Be able to personally name 10 customers (who you have talked to) and be able to describe them in intimate detail.
- Do you have a detailed and paranoid view of the competition? – Why start a business before thoroughly understanding the competitive landscape? And yet most competitive analyses fall far short. Many ignore obvious direct competitors and few deal with substitutes effectively. Be more paranoid!
- Are you ready to work for someone else? – When you have shareholders you’ll no longer be working for yourself but for them. It’s a major mindset change from being a sole owner to being a manager who can be fired…
- Do you have a better alternative? – Successful bootstrappers know that you can do without most of the things you believe you can’t do without. Make sure you weigh the time and probability of raising money with your next best alternative, which might actually be pretty good.
- Are you ready to give up a modest payout to yourself to go for a bigger, riskier payout for your investors? A lot of people don’t understand that a “lifestyle business” that generates $1 million in profit per year is not interesting to many investors. But it’s very interesting to most entrepreneurs. Understand why investors and entrepreneurs have different motivations before you take on any investors.
Answering these questions will help you diagnose whether you’re ready to raise funding or if you should be looking for investors in the first place.