The idea of raising VC money for your tech startup is intimidating, but it’s important to remember that you don’t need it. You can bootstrap your business and grow without VCs.
The what are some reasons why venture capitalists rarely give feedback after they reject your answer is a question that many entrepreneurs ask. There are a few reasons why VCs don’t provide feedback, and the most common reason is because it’s not their job to help you raise money.
When I was looking for a co-founder for my company, they would bring up venture capitalists and financing every time I got into a serious conversation about commitment with prospective partners. During these talks, one of the first questions asked of prospective co-founders was, “Have you raised money yet?” as though raising money was a prerequisite of starting a digital company.
Fundraising seems to be a widespread misconception among first-time tech entrepreneurs—and even some more seasoned entrepreneurs—that it is a necessary stage in the process of launching a technology business. They read stories on TechCrunch about companies receiving large, early rounds of financing from venture capitalists, then start putting together pitch decks and attempting to raise funds for their own company.
When you look at the history of today’s top tech firms, you’ll see that almost all of them began without outside funding. Facebook, Apple, and Microsoft all began in garages or dorm rooms and did not seek funds until they were ready to expand their operations. Many businesses, such as PlentyofFish, Balsamiq Mockups, and Shutterstock, have been successful without ever seeking outside capital.
Here are some reasons why you should forego VC funding and instead focus on growing your company.
It’s unlikely that you’ll need it (yet)
Raising funds is all about allowing scalability (i.e., the capacity to grow on a previously successful business model), and even if you’re just starting out, you still need to develop your product.
development of a product
Product development should be done by the founding team, and doing it without outside funding—surviving on a low budget and working under severe pressure—is a strong measure of how committed your team is to the company and how effectively they collaborate.
Furthermore, the expenses of starting a technological company are very cheap. For my company, which provides music for businesses, Amazon Site Services costs $25 per month for web hosting and storage, different freelancing services cost about $100 per month, and we handle all of our own technological development and marketing (primarily SEO).
Marketing
There are numerous free marketing methods you may utilize to get customers, including as SEO, social media, and email marketing.
We’ve had a lot of success with SEO. Almost all of our leads originate from Google, either via a direct link to our landing page or through our blog. Develop your writing skills, start a blog with information your target consumers may be looking for, and learn all you can about getting your content to rank on Google by visiting websites like Backlinko and QuickSprout.
Funding isn’t required for product development and marketing in the early phases of a digital company. The errors you make will be less costly if you accomplish these things without outside financing.
Your time would be better spent elsewhere.
It takes a long time to raise funds. It’s believed that it may take up to three months of full-time labor for experienced entrepreneurs. This may take a long time for novice businesses.
Instead of trying to speak to VCs, you might spend that three months developing your product. Even after you’ve launched your product, you’ll probably need to iterate a few times before you reach product/market fit. This will be a far better use of your time than fundraising, and it will allow you to see whether you have a sustainable company plan early on.
You can keep control of your company and grow from the income generated if you can develop a product and establish product/market fit without seeking money. Getting regular income in return for utilizing your product is much more beneficial to you and your company than selling a piece of your firm for a one-time payment.
Build and release your product, then get feedback from consumers to learn what makes them tick. Without any outside financing, I was able to learn programming and submit my app to the app store in three months, and I’m now in a much better position to seek money since I have some user data on which to base a viable business model.
You’ll be given a low appraisal.
When investors consider investment possibilities, they don’t consider whether or not they should invest in a particular company; instead, they consider which of the various alternatives they should pursue. Investors want to put all of their money into one place to maximize their profits—only it’s a question of where they’ll put it.
Put yourself in the position of a potential investor. If you had $1 million to invest in new businesses, would you rather put it into a company with no product, no traction, and a team that is new to entrepreneurship, or would you rather put it into a proven team and concept?
Most investors prefer the latter, and if they do invest in a younger business or team, they expect a higher return. If they typically ask for 20% ownership for an established team and idea, they could ask for up to 40% equity in a comparable round with an untested concept and team.
If you’re a newer entrepreneur with an unproven company concept, find a method to test your concept on a modest scale to show that your business model will work and that you can execute successfully. Then, when you’re ready to scale up something that’s already functioning, go raise money.
You haven’t decided how you’ll spend the money yet.
Your financial forecasts will be more inaccurate than you realize if you’re starting a company with no product, no workers, and no income. Instead of your own financial history, you’ll find yourself predicting revenues and expenditures based on the costs and revenues of comparable existing companies.
The problem with using numbers from similar businesses is that these businesses have already scaled up operations and figured out how to execute their marketing strategies, so their expenses and revenues—such as customer acquisition costs, customer lifetime value, and average revenues per customer—are unlikely to apply to you at this stage of your business.
Customer acquisition costs may be $35 for a large company, however this is averaged over all marketing channels. You’ll probably concentrate on a few, highly optimized marketing channels in the early phases of your company.
It takes time to figure out your marketing channels and who you’ll need to employ as a company. Dropbox had planned to use Google Adwords as their primary marketing channel, but after paying between $233 and $388 to acquire a single client for a $99 product, they realized that advertising wouldn’t work for them and quickly created their referral system.
VCs want to know why you’re asking for the amount you’re asking for and how you plan to spend it. It’s difficult to predict the expenses of operating a company when you have no product, no consumers, and no established marketing methods.
Instead of coming up with a company concept, creating a pitch deck, and attempting to acquire funds, get started on your business idea.
Build it, deploy it, get feedback, and iterate fast depending on the results. You’ll be in a much better position to approach VCs if you can demonstrate that consumers are willing to pay for your product and that you’ve worked out an efficient marketing channel for attracting additional customers.
The how to get funding for your startup book is a book that provides information on how to find the money needed for starting a tech company.
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Frequently Asked Questions
Why do tech companies raise capital?
Tech companies raise capital in order to fund their operations and continue to grow.
Why do tech startups need funding?
Technology startups, like all businesses, need funding to grow and sustain themselves.
Should I raise VC capital?
It is a personal decision, but the general consensus among investors is that it is important to raise VC capital.
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