From time to time, people ask me how much money to raise for their startup. I've heard other people answer that question from "never raise money" to "as little as you need" to "as much as you can".
The reason the answers vary so much is because what is best for the entrepreneur is seemingly at odds with what is best for the business. For the entrepreneur, the answer can be as little as necessary to avoid dilution or giving up control. For the business, more money can increase its chances of success. I feel the right answer is somewhere in the middle -- focus on raising enough money, so the company can succeed, but make sure you still feel good about how much control or ownership you have.
But even "somewhere in the middle" is a big spectrum. What makes this so difficult is that it is all relative to your personal risk profile, the quality of the investors you're attracting, the market conditions, the size of the opportunity, and more. There are a lot of parameters to balance.
I created the flowchart below (full-size image) to help you answer the question. This flowchart is only a framework -- it can't take into account all decision-making parameters. The larger the opportunity and the better the investors, they more I'd be willing to give up. It's better to have a small part of something big, than to have a big part of something small.
Some extra details about the flowchart:
- In general, it is good to have 18 months of runway. It gives you enough time to figure out how to get your company to the next level, but still keeps the pressure on.
- Add 6 months of buffer to handle unexpected bumps or budgeting oversights.
- If more money is available, I'd take it as long you don't give away too much of your company. As a starting point for how much control to give up, I use the following formula: 30% - (5% x number of the round). So if you are raising your series A (round 1), don't give away more than 25% (30 - (5 x 1)). If you are raising your series B (round 2), don't give away more than 20% (30 - (5 x 2)). If you start with 50% of the shares, using this formula, you'll still have roughly 20% of the company after 5 rounds (depending on other dilutive events such as option pool increases).
My view is that of an entrepreneur having raised over $120 million for one startup. If you're interested in an investor's view that has funded many startups, check out Michael Skok's post. Michael Skok is Acquia's lead investor and one of Acquia's Board of Directors. We both tried to answer the question from our own unique viewpoint.
The older I get, the quicker the years seem to fly by. As I begin to reflect on a great 2014, one thing is crystal clear again. People are the most important thing to any organization. Having a great team is more important than having a great idea. A good team will figure out how to make something great happen; they'll pivot, evolve and claw their way to success. I see it every day at Acquia, the Drupal Association or the Drupal community. I'm fortunate to be surrounded by so many great people.
By extension, recruiting is serious business. How do you figure out if someone is a great fit for your organization? Books have been written about finding and attracting the right people, but for me the following quote from Dee Hock, the founder of Visa, sums it up perfectly.
"Hire and promote first on the basis of integrity; second, motivation; third, capacity; fourth, understanding; fifth, knowledge; and last and least, experience. Without integrity, motivation is dangerous; without motivation, capacity is impotent; without capacity, understanding is limited; without understanding, knowledge is meaningless; without knowledge, experience is blind." — Dee Hock, founder of Visa.
Most hiring managers get it wrong and focus primarily on experience. While experience can be important, attitude is much more important. Attitude, not experience, is what creates a strong positive culture and what turns users and customers into raving fans.
Business model innovation is usually more powerful than technical innovation; it is more disruptive and harder to copy than technical innovation. And yet, so many companies are focused on technical innovation to compete.
Consider Airbnb. What makes them so successful is not a technical advantage, but a business model advantage that provides them near-zero marginal cost. For a traditional hotel chain to increase its capacity, it needs to build more physical space at significant cost. Instead of shouldering that setup cost, Airbnb can add another room to its inventory at almost no cost by enabling people to share their existing houses. That is a business model innovation. Furthermore, it is extremely difficult for the traditional hotel chain to switch its business model to match Airbnb's.
The same is true in Open Source software. While it is true that Open Source often produces technically superior software, its real power may be its business model innovation: co-creation. Open Source software like Drupal or Linux is a co-created product; thousands of contributors build and enhance Drupal and everyone benefits from that. A large Open Source community produces vastly more software than a proprietary competitor, and shares in the production and go-to-market costs. It disrupts proprietary software companies where the roles of production and consumption are discrete and the production and go-to-market costs are high. While established companies can copy key technical innovations, it is extremely difficult to switch a proprietary business model to an Open Source business model. It affects how they build their software, how they monetize the software, how they sell and market their software, their cost structure, and more. Proprietary software companies will lose against thriving Open Source communities. I don't see how companies like HP, Oracle and SAP could change their business model while living quarter to quarter in the public markets; changing their business model would take many years and could disrupt their revenues.
Take Amazon Web Services (AWS), one of the most disruptive developments in the IT world the past decade. While AWS' offerings are rich and often ahead of the competition, the biggest reason for the company's success is its business model. Amazon not only offers consumption-based pricing ('pay as you consume' vs 'pay as you configure'), it's also comfortable operating a low-margin business. Almost 10 years after AWS launched, at a time that vast amounts of computing are moving into the cloud, HP, Oracle and SAP still don't have competitive cloud businesses. While each of these companies could easily close technical gaps, they have been unable to disrupt their existing business models.
If you're in a startup, innovating on a business model is easier than if you're in a large company. In fact, an innovative business model is the best weapon you have against large incumbents. Technical innovation may give you a 6 to 18 month competitive advantage, but the advantage from business model innovation can be many years. Too many startups focus on building or acquiring innovative or proprietary technology in order to win in the market. While there is usually some technical innovation around the edges, it is business model innovation that makes a successful, long-standing organization -- it tends to be a lot harder to copy than technical innovation.
Background in business is a 'nice to have', not a 'must have' for an aspiring entrepreneur. I had no solid business background when I founded Mollom or Acquia (I launched them roughly at the same time).
Other than the standard things (an idea, passion and the willingness to act), the most important thing that aspiring entrepreneurs need is the understanding that 80% of entrepreneurship is sales and marketing. If as a founder, you're not obsessed with sales and marketing, you're a liability rather than an asset.
You don't have to be the best sales and marketing guy (I am far from that), but you better enjoy getting other people excited about your project, company or product. It will help you not only with finding customers, but also with recruiting a world-class team, raising venture capital, and more. So if there is one thing you should learn before starting a company, it is "sales and marketing" (in the broad sense) — and you better be passionate about it, because you'll invest years of your life to selling and evangelizing to make your company a success. Without customers or a team, you won't need any other skills, because you'll be out of business.
You need to be talking about your idea all the time. Too many entrepreneurs believe that if they build a killer product, customers will come. It almost never works like that. Smart entrepreneurs do it backwards; they find customers first and build their product only when they have customers ready to start paying. Not testing the market by selling from day one can lead to months, if not years, of wasted time and money. So stop being so secretive about your idea. You will never find your product-market fit by keeping your idea secret until it is perfect. If you're afraid of people telling you that your idea is stupid, chances are you may not be ready to be an entrepreneur.
The blog post below was a guest article I wrote for Inc Magazine and was published in September 2013. It has been a while since I shared a startup lesson on my personal blog so I'm cross-posting my article here.
When I started working on Drupal in my college dormitory 12 years ago, I had no idea that one day it would be used by 2 percent of the world's websites. What is even more exciting is the open source community that has grown up around Drupal.
I co-founded Acquia six years ago to support the growing number of organizations that rely on Drupal, and also co-founded Mollom to solve the spam moderation challenges for website owners. Six years later, Mollom was acquired, and Acquia has almost 400 employees. As I've encountered challenges every step of the way. Here are three lessons learned.
1. Think big
So often I meet entrepreneurs who are working on a startup concept. They have a great idea and a business plan to bring it to market, but they're thinking too small about what they're trying to do.
I believe companies are most successful when they have a mission to change the world. When you set ambitious goals, you'll better position yourself for success. You become what you believe.
Being shortsighted can be a big barrier to success, because you can easily miss the window to capitalize on an opportunity. It's why I founded Acquia in the United States; I immediately had access to a larger market. We moved quickly to be a global company to maximize our opportunity, and it's made all the difference.
2. Fail fast
"Fail fast, succeed faster" is a philosophy that's been adopted across the company at Acquia. It's perhaps counter intuitive, but the idea is that in building a startup, you're going to fail. There will be problems, and the faster you run into them, the faster you can learn, adjust, and grow.
Implied in the fail-fast philosophy is that you'll be open to failure, and that can be hard for entrepreneurs who are so focused on success. People don't like to fail, so they're not inclined to celebrate their failures and embrace the lessons learned. Yet doing so means you'll more quickly make the needed – and often painful – adjustments to get on the right path faster.
In the initial business plan for Acquia, we expected to support a specific distribution of Drupal that we'd closely manage. Early prospects told us repeatedly it was a great strategy, yet when we took our offer to market, the buyers weren't there. We realized very fast that our business plan needed a big change, that we needed to support Drupal in whole. It was a terrifying proposition at that stage of our business, but we realized that was what the market needed most. We made the change, and it quickly put us on a successful course.
3. Passion makes the difference
I think some people get inspired to launch a startup because of its potential rewards, but launching a successful business starts with having a passion to solve a problem. I was passionate about building websites; it was my biggest hobby before it was ever a business opportunity.
When we started Acquia, our lead investor told me the key to a successful startup isn't in a good idea, but rather is in having a good team. A good team will figure out how to make something great happen. They'll pivot, they'll change, and they'll claw their way to success. Find talented people who share your passion, and together you'll find your way toward building a great business.