Thursday, March 15, 2012

Sell your investors a ticket, but don't let them drive

I've had too many conversations recently like this one:

ENTREPRENEUR: "We're raising [insert amount of money here]. As soon as our raise is complete, we plan to [insert one or more of the following: quit our day jobs; stop outsourcing and hire a real dev team; start building our product; etc.]"

ME: "So, you're asking your investors for permission to get in business?"

ENTREPRENEUR: "Ummm..."

I appreciate that this is a gross oversimplification of a complex and emotionally sensitive issue, but I feel strongly enough about it to do a little shouting anyway:

NEVER, EVER GIVE INVESTORS THE POWER TO DECIDE IF YOU GET TO BE IN BUSINESS OR NOT

Before you tell me why this isn't as easy as I'm making it sound, let me be clear: I'm talking specifically about software businesses that leverage web and / or mobile platforms for customer acquisition and service delivery.

The reason why it's absolutely the best time ever in history to be a software entrepreneur is that it LITERALLY DOES NOT REQUIRE OUTSIDE CAPITAL to get in business. If the founding team has technical skills and a credit card to put down for their AWS expenses, they can do a ton of damage without ever asking anyone for permission.

If you believe -- or your team is configured in such a way -- that this is not true, I'd strongly suggest that you consider the possibility that YOU ARE DOING IT WRONG.

There are lots of reasons why teams that ARE able to get in business without money choose to raise it anyway (more on that later), but even if you DO want to raise money for your startup, there is a fundamental principle of behavioral psychology that should stop you from ever framing your fundraising effort as a requirement to your being in business at all:

Humans -- and investors, contrary to what you may have heard, actually ARE human -- tend to want things more if they think they might not be able to have them.

If you give an investor control over whether or not you get into business, she (a) is likely to doubt that you have the skills / confidence / chutzpah to actually build a business; and (b) will tend to undervalue the opportunity to invest, because she knows you need her more than she needs you.

If, however, you demonstrate to her that you are already in business, building product, engaging with customers and figuring out where to go next, she is likelier to view her investment as a chance to empower and accelerate your team on its forward journey.

Furthermore, she knows that, if you continue to make progress at the same (or an accelerating) rate, she might not get the opportunity to invest at a later date, either because other investors will have beaten her to it, or because you'll no longer need the money.

In other words, if you can convince an investor that your train is about to leave the station -- with or without them on it -- they are much more likely to buy a ticket.

None of this is to suggest that you shouldn't seek investors for your software business. Not only would that make my life a whole lot less interesting, there are also plenty of good reasons to raise money for a startup that have nothing to do with asking for permission.

These include:

  • Doing more faster -- Yes, you can stay up all night coding by yourself, sleep under your desk and live on ramen. But you can probably do a hell of a lot more with a (slightly) bigger team, a stronger sales effort and a little shwag to sprinkle on your best customers. Money can't buy love, but it can buy speed.

  • Commitment / active support -- When investors write you a check, they'll (usually) feel compelled to actually do work to help you succeed, not only because they like you and believe in the business, but also because not doing so will trigger uncomfortable feelings of cognitive dissonance and inconsistency with their original decision to invest. The bigger the check, the more actual work they're likely to do.

  • External validation / social proof -- Getting complete strangers to back your business, especially if they do that sort of thing for a living, is a great way to demonstrate to customers, employees, and your parents that you're actually doing something worth paying attention to. Attention is valuable.

So by all means, raise money for your startup -- if all of the above hasn't convinced you I'm an irredeemable asshole, I hope you'll raise it from me -- but PLEASE don't hand over the keys to your business to anyone who's not a full-time, all-in, shoulder-to-shoulder co-founder. And especially not to your investors.