July 17, 2023
Every founder’s journey is paved with advice – some of it gold, others while well-intentioned are only as valuable lead. In this post, we’re tackling some of the most controversial advice that founders often receive. Let’s debunk some myths and set your startup on the path to success. Remember, not all advice fits all – it’s about finding what works for your unique venture.
1. “You should practise your pitch with “backup” VCs before trying for the tier-1s”
Drawing from a variety of experts in our network, it’s clear that the advice to “practice your pitch with ‘backup’ VCs before trying for the tier-1s” is not only misguided but potentially harmful to a startup’s fundraising efforts. Here’s why:
Firstly, every interaction with a VC, regardless of their perceived tier, is an opportunity to generate buzz and momentum for your startup. The simple breaking of fundraising news can create a ripple effect, attracting attention from other investors, potential employees, and even customers. Treating any VC as merely a “practice” run undermines this potential.
The venture capital landscape is more than just an industry; it’s a tightly-knit, clique-like community where key players are often interconnected. This interconnectedness means that impressions and reputations can spread rapidly within the network. If a founder treats a VC as a mere “practice run,” it could inadvertently tarnish their standing with their purported “tier-1s”. Moreover, if founders fail to get funded by these “tier-1s” they would have little choice but to fall back down the list. It’s not a good look if these VCs realize they have received differentiated treatment.
Ultimately what matters is not the perceived tier of the VC, but their alignment with your firm’s vision, goals, and sector.
2. “You should focus on building out your back office”
One piece of advice that founders often receive is the need to focus on building out their back office. The back office, encompassing functions such as accounting, human resources, corporate services, and IT, is undeniably crucial to the smooth operation of any business.
The case for building an in-house back office stems from the belief that having dedicated, internal teams for these functions can lead to better integration, control, and understanding of the business. However, this approach can be resource-intensive, requiring significant investment in infrastructure, technology, and talent recruitment.
On the other hand, outsourcing back office functions can offer several advantages. Firstly, it can be a cost-effective solution, eliminating the need for substantial upfront investment in infrastructure and human resources. Secondly, outsourcing can provide access to a pool of experts who specialize in various back office functions, ensuring high-quality service delivery. Lastly, it allows startups to focus on their core competencies, dedicating more time and energy to areas like product development and sales which directly contribute to growth.
Therefore strategic thinking is often required. How crucial is direct quality control to your company? The key is to evaluate the trade-offs and consider the company’s unique circumstances, growth trajectory, and resource availability.
3. “You should raise as much capital as you can”
This advice, while seemingly beneficial, can be potentially detrimental to the long-term success of a startup. The reasons for this are rooted in the principles of dilution in incentives, control, the pressure of high expectations and low cost discipline.
Equity dilution is a natural part of the startup journey. As a startup grows, it often needs to raise capital to fund its operations, and this is typically done by selling equity or shares in the company. However, the more equity a founder sells, the less control they retain over their company.
Let’s illustrate this with a simple example. Suppose a founder starts with 100% equity in their company. They then decide to raise $1 million in exchange for 20% of the company. After this round, the founder still retains 80% ownership. However, if they had followed the advice to take as much investment as possible and raised $5 million instead, they might have had to give away 50% or more of their company.
Moreover, raising too much money can inflate a company’s valuation prematurely, leading to greater expectations from investors. If these expectations are not met, it can result in a loss of investor confidence and a decrease in the company’s perceived value. Raising too much funding can lead to inefficiencies in operations and an inclination to spend just because the money is available.
So, how much should your company raise? The answer lies in careful planning and a clear understanding of the company’s needs. Founders should figure out a single number, as accurately as they can in order to reach the next step for their business’s evolution.
In the dynamic world of startups, navigating through advice can be as challenging as steering the business itself. At BlockOffice, our team of experts is dedicated to providing you with the guidance and support you need to make informed decisions for your startup’s success. We invite you to reach out to us to explore how we can help you sift through the noise and focus on what truly matters for your business.