Outside capital: do or die? by Bob Rice

TL;DR - Before deciding whether or not to raise outside capital, one should think deeply about the nature of the company’s competitive advantage, its basic revenue vs expense model, and whether the perception of a well-funded venture is important or not

Helpfulness - 5

Tags - outside capital, startup financing, raising capital, venture capital, VC

Questions answered:

  • How does outside capital help startups?
  • How should founders decide whether they need to raise outside capital or not
  • In what cases do startups really need to raise outside capital?

Summary:

  • Outside capital allows startups to go “faster”
    • Since speed of iteration is often the factor that separates success from failure, access to adequate cash is often critical.
  • Many startups have other factors that can help them thrive without VC, such as niche knowledge and industry relationships)
  • Although outside capital allows startups to go “faster”, the success of a startup lies on its core advantage; should ask “will your startup’s competitive advantage/s survive even if competitors move faster?”
  • Bootstrapping usually forces startups to try to monetise early; “there’s no better test of how well your idea works, nor any better way of iterating it to real market demand, than to watch how the checks come in.”
  • However, there are some cases in which raising capital is critical for startups
    • If the only way for the startup to survive/thrive is to be the first “kid in the pool” and to create a network effect, or dominant brand, before other businesses
    • If the customer acquisition costs can only be recaptured over long time
    • If the startup’s value proposition is built on providing a secure, dependable long-term relationship for the customer (as it will need a good balance sheet and big backers to convince the buyer that it won’t go out of business anytime soon)
  • Therefore, before deciding whether or not to raise outside capital, one should think deeply about the nature of the company’s competitive advantage, its basic revenue vs expense model, and whether the perception of a well-funded venture is important or not