Searching for the Moon

Shannon Clark's rambles and conversations on food, geeks, San Francisco and occasionally economics

Building a business vs. Raising money

Posted by shannonclark on June 30, 2010

It has been over 2 months since my last blog post (and yes that’s a deliberate echo of my early Catholic upbringing, the way you would start saying your confessions…). So why such a delay?

Mostly because for the past few weeks I have been heads down working on a new business idea, we aren’t quite yet ready to announce what the new business is, still lining up early customers, partners and we hope investors (contact me privately for more information and to discuss meeting with you if you are an angel/early stage investor or if you are involved in the games industry).

While I have been working on this I have also been thinking a whole lot about the differences between building a business and raising money and how even now 10+ years after the first bubble the difference between raising money and building a business is lost on many people and not helped by the tech press who have an obsession about writing about rounds of funding and only rarely writes about business milestones (the occasional PR driven post about a company hitting some numerical milestone – often one only marginally related to the actual business model of that company is perhaps an occasional exception).

In this past week a clear example of this is the press around the $20+M round of funding recently raised by FourSquare. Now don’t get me wrong, I am a fan of FourSquare (though I think they have some major growing pains and need to get far more professional in their engagements with actual paying customers – i.e. how they engage with marketing agencies, Brands and companies big & small)

One of my favorite tech blogs has a post which is illustrative – http://www.readwriteweb.com/start/2010/06/investor-blogs-weigh-in-on-fou.php which summarizes the discussions across many investor’s blogs about the recent round of funding which FourSquare has raised. These posts have some great advice for the entrepreneur, specifically to meet with and cultivate relationships with investors early on, earlier than when you are “ready” to pitch those investors.

But the tone of the piece as well as the posts from the investors is very much a symptom of a the problem – it is as if having raised a large round of funding the is the end game, not as it actually is just the beginning. The hard work, the real work, of building a sustainable high growth valuable business is now ahead of FourSquare and their recent round of funding is just one of many steps which they have chosen to take that, I hope, will get them to being a great company – but I actually have some serious doubts.

Back in the early 90’s I interviewed at a very well funded, even for those times, startup outside of Chicago. The startup had spun out of another company, raised a ton of money and even as I was interviewing for an entry level position I walked past the offices of the multiple VP’s which the company, pre-launch mind you, already had. In seeing those VP’s offices I knew immediately that this wasn’t a company which was likely to survive and though I completed the interview I had already decided that my future would not be with this company. Indeed they failed not all that long later losing millions for their investors.

A large round of funding, even many large rounds of funding can hide serious underlying flaws in a company and can in many ways tune the actions of the company towards raising additional rounds over building the business. In the case of FourSquare while I am happy that they have gotten a nice office space in NYC and are growing rapidly, I have also observed that they have sub-par iPhone applications and in talking with friends at large agencies they have a limited imagination and at times less than professional way of engaging with even very large agencies, agencies who represent some of the largest Brands in the world (and who have large marketing budgets and creative talent to allocate towards creative campaigns).

And while relying on “one off” advertising/marketing campaigns may be a tough way to build a business if done well it can be very sustainable and the upper limit of revenues is quite high. Especially if a successful campaign can become a part of how various businesses do business over a one-off push for goodwill. But the relationship skills needed to build out such campaigns, to manage interactions between agencies and Brands are very different from the skills needed to raise money from early stage investors – and different again from those needed to engage with the technology press. Not unrelated skills but different ones.

More generally large funding rounds, while not in and of themselves a bad thing (though at times a very real argument can be made for the downsides) can often allow a company to get into bad habits early on. A company may hire too quickly, take on too large of a lease (space isn’t the problem – what can end up taking too much time and attention is finding, negotiating for and filling up a space with furniture, computers etc – and the people that then go with them).  Some of this “waste” is what investors intend when they fund a company – to give the founders financial room to make a few mistakes without putting the whole business at risk, to give them resources to toss money at some problems instead of time.

But too much of this leads to dangerous problems and it also leads to the very common situation of a core management team that when they close their first round find themselves almost immediately working on closing the next round and the next beyond that. As a friend and advisor to many entrepreneurs I have observed this situation first hand – friends who disappear from all social and professional engagements for months of pitching dozens (sometimes 100’s) of investors, of constant updates to their pitch deck and of work focused on developing the demonstration of their product (over at times actually building the product and the business around their products). Once they have raised money they often then find themselves deeply focused on numbers that can appear “sexy” to the tech press and/or to their investors (and future investors) often again over building out the business aspects of their startup.

By “business aspects” I mean actual revenues – whether from individuals or from other businesses.

Yes, there are a handful of seemingly successful counterexamples (Twitter may be the current favorite, though they have started to turn on revenue producing services finally) but there are far, far too many counter examples.

In my new business we are focused quite specifically on revenue production from the very early stages and while we plan on raising money our best and likely most reliable source of “funding” will be sales and repeat business from happy customers. If we get very good at selling to other businesses not just initially but on an ongoing and growing basis then we can be very strategic when it comes to raising money. We will probably still need to raise money but a solid business base will give us leverage and flexibility as we raise money and should also help my co-founder and me avoid the trap of focusing on our pitch to investors over our sales processes and products.

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