Fundraising

The Dangers of Raising Venture Capital Too Early

When entrepreneurs ask me how to raise the money to build their product idea, my answer is always the same: you’re asking the wrong question.

I’ve managed to raise investment from a PowerPoint presentation twice over the last 10 years. Starting off with money in the bank sounds like a great idea — but it turns out that it’s not that simple.

The cost of investment goes beyond equity dilution. Raising capital changes your mindset, often in unhelpful ways. Here’s why I’d never raise outside capital at the idea stage ever again.

1. Investor discussions lock down bad assumptions.

As you pitch an early-stage idea, investors probe into your business assumptions. Over time, a consensus naturally forms around the most ‘investable’ assumptions. When the investor finally says ‘yes’, it feels like a form of market validation. As the focus turns to planning, the latest set of bad assumptions are locked down . . . and they’ll come back to haunt you later.

2. Hiring people puts a layer between you and ‘the front line’.

When you’re building an idea, hundreds of tiny decisions need to be made. Raising money allows you to recruit other people to take some of those decisions for you. However, every designer, developer, marketer, and salesperson you hire takes you one step further away from your customers and technology. This creates a communication overhead that’s hard to manage — especially at the idea stage, when the learning curve is steepest.

3. Raising capital is an excuse for not skilling up.

Every successful founding team I know has had to painfully learn the basic skills needed to build their ideas themselves. This includes how to design, develop and sell their idea, and a need to raise money early is often due to a lack of these skills.

I’d always suggest looking for ways to fill the gaps that don’t require funding. For example, look at recruiting, creating partnerships, or — my personal favourite —…