There are two theories with raising capital for startups.

On one side you get….money is evil don’t raise it. The Basecamp founders are in that ‘camp’. They aren’t wrong in warning people about the potential issues. Their ROI math says that selling a fully owned business for a smaller value can provide a better return than selling a venture business that you own a small percentage of.

On the other side you get…raise more money than you need. Reid Hoffman champions this camp. Break out scale, especially when accomplished in under 10 years, takes a lot of capital.

Both of these sides are right. They are just two different ways to build a company. Both come with positives (and negatives) and the tradeoffs is a whole post in itself.

When it comes to raising capital the questions you get asked a lot from fellow founders is…should I raise money?

I used to think they were asking about which business path to take. Eventually I realized they didn’t actually want help with the business path. What they really wanted to know is what happens to them and their company, if they raise capital.

Here is how I think about it.

You’re Adding Gasoline

Before asking if you should raise capital, understand what it is.

Capital is gasoline.

You can raise it in single gallon containers to get an idea off the ground. Or in 737 sized allotments to fuel a startup airplane. The amount is irrelevant. Your ability to accurately use it, is what matters.

I say accurately because gasoline is an accelerant. To the positive it can enable you to learn faster, creating greater momentum in order to raise capital or become profitable. To the negative it can uncover bad strategy faster, creating negative momentum that is very hard to recover from.

The question, should I raise capital, is really a question of…do you know how to use the gasoline?

You’re Adding Expectations

Capital comes with expectations. Yeah, duh.

It’s not that simple. The level of expectation compounds over time.

In the early days the expectations are low. People who invest are generally banking on you, often assuming your initial idea won’t be the big idea in the end. It’s easy to fall into the trap assuming that low expectations from early investors are what you can expect in later rounds. It’s not.

Each coinciding round of capital brings new, higher expectations. Higher valuations assume you know what you’re doing in spending more capital to build an even larger company. Later stage investors are more risk averse and will therefore pay greater attention to how well your business is performing. Their expectations will be tied to how well you can operate and scale a company.

If additional expectations stresses you out, then capital will not help. You can’t fire your investors, but they can fire you.

If additional expectations are what you thrive on then investor capital can be good. It will force you to raise your game.

Expectations aren’t bad. Your employees have them too. Just know that expectations are part of raising capital. Wanting the money, but not the expectations doesn’t work. Therefore you need to either love the exceptions or the process of managing them.

You Need A Team

Being successful with investor capital is easier if you have a team. A team that you trust. One that you’ve been to battle with whom you know can turn capital into more capital.

Taking this back a step, when you raise capital from new investors you’re adding new relationships. These relationships increase risk because they add new dynamics to your company. If you then add a new leadership team on top of these new investor relationships you have multiplied your risk in being able to turn capital into more capital.

Therefore before I raise capital I either want a team that I trust or a methodical process by which I can successfully build a leadership team. Both can reduce my risk and increases my chances of success.

Even with a process to build a leadership team, most hires only work out 40% of the time. A 60% miss rate combined with new investor expectations can be a fast way to crash the plane. Or get you fired.

What makes new team building hard with capital is that you have move at a faster rate. In the early years you need a team that can turn an idea into a business. In the later years you need a team that can get an ROI on the capital, making it worth 2-10x the price you raised it at. The more you raise the faster you have to go in building the team. The faster you go the more stress it puts on your culture.

Your direct experience in building a leadership team matters a lot in your decision to raise capital.

You Can’t Run Out Of Money

The amount of capital you raise should be a plug value to what you need to prove to yourself. You should have a clear 1,2,3 that is tied to the current stage of the company.

For example you might take an angel round to prove you can make a product, acquire customers, and successfully reach a next customer. In order to accomplish that you need blah dollars and a set of investors who are excited about customer discovery.

Regardless of your 1,2,3, you need to map to your next safe spot. That can be a traction point that lets you raise more capital or to a profitability line so you don’t need more capital. These safe spots vary wildly by company and can totally change depending on the capital climate.

Here’s the shitty part, your existing investors aren’t really going to help you in making sure you make it. They will try to assist but it’s on you to make it to that next point and then raise the next round of capital you need. They don’t have the time or appetite to constantly keep you afloat.

Going back to the original question, should I raise capital, it depends on how confident you are in using the capital to reach your next safe spot.

You Have To Grow

Your growth rate is all that matters. It doesn’t have to be blistering but it has to be consistent.

Just look at public companies and which ones have the highest valuation. They are all tied to the company’s growth rate. The ones with higher multiples have higher growth expectations. This is true in the private markets.

With growth comes pressure. Pressure can raise everyone’s game, see professional sports. But it has its downsides if you don’t know how to manage it.

Playing with more pressure it’s a bad thing, it’s just a choice. If you make that choice then you have to really internalize that choice. There is no going back until you are out of the company or out of cash.

You Have To F*$%ing Love It

The biggest knock to raising money comes from people who don’t like it. They don’t like everything that comes with the capital and that’s ok.

But it’s also ok to realize that you love trying to build companies that scale faster with more capital. It’s ok to be obsessed about it and to spend your waking hours trying to make your company successful. You shouldn’t feel bad for enjoying this path.

The Reid Hoffman Blitzscaling playbook can work to build massive, category winning companies. See Netflix, Uber, Zoom, Spotify, LinkedIn, and Fitbit. They all raised large amount of capital to win a category.

It’s also true that for every success story comes hundreds of failures where large amounts of capital didn’t work. That doesn’t mean you shouldn’t do it.

Don’t Become An Asshole

My closing remark is don’t raise money and become an asshole. Raising capital is about adding more gasoline, it doesn’t mean you’ve been successful. A startup car with a HUGE gas tank doesn’t mean you’re better off.

It does take confidence to raise capital. But it also takes humility in becoming successful with it (or at least I think it should).

DM me @marcbarros if you have any questions.