We had an interesting business case and dilemma in the last week where we saw an interesting startup that had quite a lot of potential. The company offers an intelligent system for hotels to better manage and communicate with their clients through their phones. You can use the system to order for example new towels when you are in your room without having to pick up the phone and wait to speak with someone.
The issue was that this company which just got started but is already generating revenues was raising a seed round that seemed too small. It was clear that by raising such a small amount, the company would need more cash rapidly and would probably not get to the next level without it. One could think that this is perfectly fine as investing a small amount would be less risky, you could see how the company evolves and then you could give additional funding. The reality in this case is that sometimes the amounts are too small. If you don’t have enough money to really move the needle from a business point of view, you can find yourself in a similar situation just couple of months after. Yes, you have some better results and a bit more clients but the risk for investors is to an extent similar. The concept is not yet fully blown and so nothing really changed.
The issue is also that the way you raise money and the investors you accept in your company are very important for your future. If you raise with a too low valuation or too high, you might face additional hurdles. If the investors you choose are not the right ones for other phase growth, you might find yourself in endless discussion when you go to raise big bucks. Also, we know that today the largest funds are interested to invest massive amount of cash as they seat on large treasury chest and if you don’t give them compelling reasons to do it, they won’t.
By not having sufficient funds to get to the next level, you are simply getting diluted and will need to spend more time in the near future fundraising. This is not good for the business. For an entrepreneur this is also a pain in the neck. It is better sometimes to remain nimble and try to bootstrap for longer period of times so when you do a round you really do it big time. Not half a round.
It is clear that sometimes the reality of the business and the situation doesn’t offer you an alternative. If you are running out of cash, you might have to take the deal that is on the table. But before you get to this situation, remember that it is always a good idea to really define in advance how much you really need to get the the next fundraising series and continue building a real competitive advantage. Not doing it is extremely risky.