The picture sums up the problem with so many web businesses that raise money, particularly when they raise too much, too early. The issue is pretty simple – until you know what to do with the resources you obtain, there’s very little to be gained by raising them.
I often say that giving money to a startup is like giving money to a street drinker. It’s what they think they need, but it’s actually only prolonging the problem.
Let’s face it, it’s always someone’s money you’re raising, and entrepreneurs have got a responsibility not to waste it. When looking to raise, one of the questions entrepreneurs should ask is “Would I put my granny’s money into this?” If the answer is “no, not even if the risk was spread across a number of similar firms,” then they shouldn’t be asking anybody else to put their money in, either.
Typically, what I see in the tech sector is a bunch of companies trying desperately trying to raise money, who fall into one of three traps:
1. Crap idea
2. Crap validation
3. Crap execution
Let’s break these down. If there’s no demand for a product or service, your idea is crap – end of. People use all kinds of shit products every day. Microsoft Windows, QWERTY keyboards, etc. These only exist because of habit. But they are ubiquitous because at one time, they were amazing. QWERTY allowed typing without jams on mechanical keyboards. Windows allowed a GUI on generic hardware. If you want to make your product a success, it has to be **amazing** for a cohort of users – or laziness and indifference will destroy you.
However, being amazing isn’t enough. You have to amaze enough people, who have enough money, to actually make a business. You can check that the idea serves that purpose on paper. But you then have to actually validate. This can take many forms: a review of competitor products; surveys; paper prototypes, clickable demos, etc. However, what you rarely need at this stage is an actual, working product. Yes, a beta validation is great, and if you have a technically-simple product, there’s no reason not to throw together a working prototype and see if it flies. But in many cases, products may be more complex to develop. Soon, feature-creep, market-creep and scale-creep sets in, and before you know it you’ve wasted 18mths of your life sitting in an ivory tower, developing a product that nobody understands or needs.
After validation, you need to execute successfully. To be able to do this with confidence, you need a clear sense of direction. What does that mean, in practical terms? There’s not one right answer, but here are some features which are common to teams that can execute successfully. They are either already experienced in executing in their market, or have advisors who are. When I say advisors, I don’t mean people they have a coffee with two or three times a year, to add an impressive name to the pitch deck. I mean people who are financially incentivised to make the business succeed, and who have frequent contact with the team. Realistically, I’d say that’s at least one significant meeting per month. Execution isn’t all about the team, it’s also about the plan. Each step on the roadmap should be considered as rigorously as a new product, if significant development resources are to be expended on it. For example, if 80% of your users are on mobile, why bother with a desktop-optimised version? Misdirected development is a key waste of resource, especially in the early stages of growth. The other commonly-wasted spend in a startup is marketing. All too often there is an insufficient understanding of sales and marketing. These skills are available on the open market, so hire them. Don’t get someone who can execute your bad plan, get someone sufficiently senior to make a good plan, and then you can execute on that. You can sell using everything from tradeshows to telesales, from PR to PPC. Test everything – the message, the channel, and crucially the scaling. For example, when you spend your daily PPC budget in an hour, can you still get a return?
When you’ve gone through all the above process, and it’s all worked out, THEN raise some money. Until then, your granny is safer with the money in her bank account.