The Fundraising Paradox

The goal of a startup isn’t to go out and get funding, though it might seem like it because so many successful startups raise money. The goal of a startup is to be in a position where you don’t need to fundraise because you are rapidly growing and Default Alive.

Default Alive

Default Alive means that based on your current Expenses, Revenue, Growth Rate, and Cash on Hand, your startup is on a trajectory to reach profitability before running out of money. If you don’t know whether your startup is Default Alive or not, you can use this nifty calculator to help you find out.

Being Default Alive gives you freedom because you don’t need to raise more money to survive. Oddly enough, it also makes it easier to attract more money because you seem less desperate to investors, making them want to fund you. Though it may sound paradoxical, the best way to raise money is to get to the point where you don’t need to.

Two Types of Fundraising

If your startup is at this point, you can consider raising additional capital if you can use the money to grow even faster, you are willing to give up equity to do it, and you clearly know the results this will get for your startup. You should also know how much money you’ll need to hit your next milestone and aim to raise just that amount, as your dilution matters.

As can be seen, there are almost two types of fundraising: 1. Where founders don’t need money but raise some to grow faster than they could on their own revenues, and 2. Where founders need money and seek it because they know that their startup will die otherwise. Many founders hear about famous startups doing type 1 fundraising and decide that they should raise some money too. Except when they do, they don’t have a clear path to profitability and thus fall under type 2 fundraising, and then end up being surprised by how difficult it is.

Ultimately, fundraising is just a means for your startup to grow faster. As a founder, your goal should always be to get back to what will make you successful – building things, talking to users, and making sure that your startup is Default Alive.