The *Real* Value of Money for a Startup
Last week, I was reading a post by David Cummings, the founder of Pardot and author of one of my favorite entrepreneur blogs. His post was on the need for seed-stage entrepreneurs to demonstrate growth momentum, even at modest scale. His primary point is that ‘fundable’ startups demonstrate a track record of sustained growth, which is what makes them attractive to investors.
This got me thinking about the real value of money for startups, especially seed-stage startups like the ones we’re working with at Conquer. The value, in my estimation, is to get to sustained growth.
Why Investors Invest…and Aren’t Investing In You
It probably goes without saying, but investors invest because they want to see a return on their investment. In other words, they want to be able to see that every dollar they put into your startup is going to turn into some amount greater than $1. Ideally, they see every dollar turning into $10 or more over some time period (usually years, not decades).
Yet, when I ask most local entrepreneurs what they need the money for, the answer is almost always “to build [insert product here].” Or, another common variant, “To hire developers to build….”
When I ask how many customers they currently have or how many customers they need to acquire in order to warrant the spend on product development, I’m often greeted with a shrug or blank expression.
Most investors – even at seed stage – aren’t going to be willing to invest if there isn’t a roadmap to – or more, likely, evidence of – sustained growth.
Use of Money a Maturity Milestone
I remember one of the economics textbooks I used when I taught high school Economics several years ago defined an entrepreneur as (paraphrased), “someone who organizes land, labor, and natural resources to generate an economic profit.”
I’ve always liked this definition because of it’s focus on ‘resource deployment,’ rather than simply ‘product development,’ which is a more apt definition of an “inventor.” You’ll notice, for instance, that there is no explicit mention of “money” in that definition.
One of the things I’ve learned watching some of my entrepreneurial heroes is that they are, above all, resourceful. They are able to identify resources, discern which ones are assets, and then figure out how to organize them in order to generate a productive return.
In this definition, money is merely a resource.
And it is one of many. Others include our networks, our wits, our skills/knowledge, persuasive ability, and so on, to name a few.
Entrepreneurs are good at recognizing assets and opportunities and marrying them. While it comes naturally to some people, I think that it’s also a learned skill…at the very least, I work daily to get better at it.
Sometimes marrying resources and opportunities requires money.
Sometimes it does not.
That’s part of the fun of being an entrepreneur – figuring out how to configure resources to accomplish something of value.
Which brings me to the point about maturity.
Recognizing that money is a tool to facilitiate sustainable growth is a significant milestone in an entrepreneur’s growth. Being able to answer the question “How will this dollar turn into more?” and “why is that use of this dollar better than any other potential use of it?” is a sign that you’re thinking about it the right way.
Focus on Growth
I hear on a consistent basis that “there isn’t enough capital for startups in Lansing.” That may be true, though both Jason Schrieber (Arialink) and Matt Hill (LiquidWeb) were able to figure out how to build ‘exitable’ companies here.
And, to be honest, we used to complain about the same thing in Atlanta, where there is a lot more capital than here.
In the end, I’ve become convinced that there is always capital available to fund growth, whereever sustained growth can be demonstrated.
The reality, though, is that it’s hard to do that. Really hard.
But it’s also where your focus needs to be if you want to have any chance of ‘raising money.’ But, who knows, by the time you reach that state of sustained growth, you may not need even need it.