There is a common dream amongst startup people – some call it risk mitigation and some think it’s nirvana. I’m talking about raising cash when you have none of your own.
There is an odd expectation that you can raise an entire seed round (i.e. the first one to get you off the ground) with just a good idea – with no traction and none of your own cash invested in it.
It’s harsh but I’ve personally never seen it happen. You need to have one or more of the following two things to make it happen.
Let’s start with what we call “skin in the game” – this simply means you’re all in cash-wise. I heard it on Shark Tank last week. A shark said something along the lines of, “you’re not getting my money if you’re not full-time and all in”. I agree with her point. If you can’t commit full time to a startup, why should they?
Beyond your actual time, there is the cash component. Being “all in” on a project is something that’s smiled upon in investment circles. It’s just like a bank – they rarely lend 100% of the cash for your house. They want you to put down a deposit to show you’re serious, but not all in.
For your startup, investing EVERYTHING you have is a must if you’re raising early stage funding. Take Atlasssian – a multibillion dollar Australian success story. The founders maxed out on all their credit cards to get the startup of the ground (you can read more on this here). This shows massive skin in the game. I’ve even seen founders re-mortgage their houses – they back themselves.
The second thing you need is traction – that is, customers and growth. This is ultimate validation for a startup as it proves there are people out there who are willing to spend money on your product or service. But this is tricky if you need the cash to build a product to get customers.
Great thing is, to a point, you can fake it. If you’ve ever heard of the saying “fake it ’til you make it” you’ll understand that you can fabricate growth.
Take Dropbox. It raised money and got customers with a mock-up of a product it would then build. The company had massive amounts of people sign up for a non-existent product. This traction was more than enough to raise a huge seed round. You can emulate this with sign-ups, interviews and promises to purchase upon launch.
Simply put, you must be 100% in your own startup financially and mentally to have a chance of getting it off the ground.