Three questions any entrepreneur should ask herself before raising capital.
‘Since 2012, we have grown 12% every month. We have expanded internationally. We have beaten our multimillion dollar funded regional competitor. Our brand is fresh and used to describe the crowdfunding business model in general. All that while being profitable and without raising $1 dollar of capital.’ - Norman Muller, Co CEO of Fondeadora
It might come as a surprising statement coming from a VC investor but capital may slow you down and eventually kill your startup. It is hence paramount to make sure that you are raising capital for the right reasons and at the right time. Otherwise you are better off bootstrapping your way to success before you think about inviting an investor to join your dream.
To approach this. I suggest answering the following three question before raising capital from angel investors, venture capital funds or corporate funds:
1- Why do I need the capital?
The following table shows some of the use of funds that seem difficult to postpone or avoid. In general, companies that need to buy or build real assets, invest in economies of scales or network effects require capital to win.
2- Can I avoid building or buying?
Being able to scale while avoiding to build or buy real assets or non-strategic intellectual property is paramount for any lean strategy. It eventually may have a huge impact on your return on equity. Renting is the most straight forward way. Some extremely successful business models are built around using excess capacity in the economy while providing a strong value proposition. Think Airbnb, Uber and Instacart. Outsourcing some of the services is also smart. Formafina, a Latam regional cross border e-commerce, outsources most of its logistics operation to merchants and delivery companies making it one of the most productive and nimble players in the market.
3- Should I raise capital now?
It seems that in the current Silicon Valley environment of cheap money, the answer is always yes. While theoretically, there is always a price (valuation) where it makes sense to raise capital, I believe even in that environment founders should ask themselves if it makes sense. In almost any other ecosystem in the world, if it doesn’t affect your prospects, founders should postpone raising capital as much as possible. Moreover, in the case of Latam founders, raising capital takes time and will distract the management team from building their company.
Raising capital is a decision with long term implications. It should not be seen as a default step for innovation or impact. Moreover, having too much capital when a product is not ready for the market or the market is not ready for the product will destroy value and potentially make it impossible to raise additional capital. Getting a product right may take years. During that time, a team grows and a company changes, therefore the kind of investor you need changes. Postponing a round allows founders to choose an investor that will bring the right skills to the team.
In 2011, the Mexican market wasn’t ready for the crowdfunding model and crowdfunding platforms had crappy user experience. While Fondeadora was growing organically in Mexico with little resources, its regional competitor raised millions to finance marketing and an international expansion in three countries. Fast forward to 2014, Fondeadora’s competitor had trouble raising a series A and capitulated. Fondeadora is about to launch its third market to confirm its regional dominance. No capital has been raised by the company since inception.