Seek advices: Raise Money or not?


1

I've $100,000 from my personal money for a new company. I was thinking about going to Austin, TX, as I've heard Silicon Valley is more to raise money than to actually develop apps. Viewing all the success of the Silicon Valley companies, I wonder if I have to consider raising money too. I have a strong business plan and a working prototype which I think make good assets for raising money.

I think about 2 scenarios :

  • Start small with me, my own money, hire 2 employees and grow in size in a few years.
  • Raise money, like $300,000 or more (don't know what amount to expect exactly), hire directly 5/6 people and aim big in a short notice.

What is your opinions? Does someone have past experiences with decisions like this?

Venture Capital Angel Business Plan Fundraising

asked May 25 '12 at 23:55
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Hartator
116 points
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1 Answer


2

I've raised money in Silicon Valley because I didn't have 100K in my bank account to start with. Here's my recommendation, without knowing more about your situation other than what you've shared, and of course, biased with my own experience and perspective.

The MINUTE you raise money, you loose control of your company. It doesn't matter that you're only raising 50K and only giving up 5% of your company: someone else is on board with you.

Building a business from the CEO position is a lot about making decisions. Since you're the entrepreneur, you're most likely more able than others at making decisions about your business; otherwise you wouldn't be where you are.

So decision 1 comes around: you call it white and the investor(s) calls it black; turns out you were right. But somewhere along the line, at decision n, you're going to call it black and the investor(s) is going to call it white; turns out the investor was right. And then, you might hear things like "I told you so ", or "what were you thinking? ", or "I trusted you ", or worse: "move over, I can do better than you ".

Now of course, I'm not advising against raising money: you need capital to build a business and therefore you need investors.

In my opinion, they key is raising money at the right time. At the moment, you have a prototype and you seem to have enough capital to launch with 1-2 people. If you can use your own funds to reach self-sustainability, then that would be ideal because it would mean that you would have been able to both build a business that serves a demand and figure out a viable distribution channel. You might reach that stage in 6-12 months instead of 3 years, who knows. And then, you can raise 2-5 Mio from a VC to scale a proven business model. I made the mistake of raising capital from some of the worst kind of investors and then scaled too quickly so I'd say that not raising money will save yourself from making 2 unforgiving mistakes. Imagine what would happen if you raised money but for some reason weren't able to reach self-sustainability: what would that investor do? There are no friends in business, only people whose interest you can sometimes align with yours.

The biggest downside of not raising capital at this stage is this: 100K is not enough to figure out your business model and you'll have to shut down after you've exhausted your own funds because at that point, it'll be nearly impossible to convince an investor that there's still a viable model ahead. In my opinion, that's the biggest downside you need to consider.
The upside of raising capital now might be that you get involved with good people and that you can scale quicker; but consider the potential downside!! I think raising money in your stage might be something you could end up regretting in the future.

As for moving to Silicon Valley: definitely!! It's easier to recruit people with relevant start-up experience, it's easier to network, and it'll be easier to raise capital when it'll make sense to. Not to mention the weather!!

Good luck in your business.

answered May 26 '12 at 01:04
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Frenchie
4,166 points
  • thanks for your response! You seem to have a bad experience with fund raising! one little question, if you think the best is to manage to reach self-sustainability by your own found, why you recommend the silicon valley where the costs and regulations are high? (the weather of course :) ) – Hartator 8 years ago
  • Because you'll meet the people whose advice and connections you'll need: employees with start-up experience, great developers, experienced entrepreneurs, PR... Imagine yourself setting up a non-binding board of top-notch advisors: the hardest part of entrepreneurship is getting the company off the ground and generating revenue. Surround yourself with the best: most of them hang out in Silicon Valley. – Frenchie 8 years ago
  • ok, thanks, I'll think about it. What make me wonder is that the average salary for rails developper in the silicon valley is $116000 in silicon valley whereas $79000 in Austin. With my own money only, I can afford hiring in Austin but no the Silicon Valley, no? – Hartator 8 years ago
  • @Hartator: that may be true but I think you're also much more likely to find developers willing to work for equity in the Valley than in Austin. Your equity is your currency. One more tip: before you hand out stock-options, make sure your employees first go through a trial period! Good luck. – Frenchie 8 years ago
  • ok, good point! I am not close minded, I can do that. Have you tried yourself? – Hartator 8 years ago
  • Hired developers for pay: got crap. Had to hire developers for equity to get my software fixed... – Frenchie 8 years ago

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