Startup entrepreneurs are at a unique time to raise venture capital. However, there are also risks.
Do not be fooled; 2021 will be a hot bull market for startup entrepreneurs. The market is booming, there are many opportunities for capital, the valuations are high, and the terms are favorable. Due diligence has become a non-issue for many investors.
The rapid recovery from the pandemic was impressive, with a record amount of venture capital investment in Europe in 2020 at EUR42.8 million across 9,341 deals. This record will likely be broken by 2021.
This is excellent news for entrepreneurs seeking funding. More money is available than ever before. But is there a hidden price to this exuberance?
There are many traps that entrepreneurs could fall into when raising venture capital funds.
Entrepreneurs can become distracted by the temptation to raise more funding rounds. They may be better suited to focusing their attention on growing their business instead. The previous cycle of raising funding, focusing on building the company, and raising financing was replaced by blurred lines. Companies are constantly having conversations with investors and simultaneously managing the day today.
Suppose the consequence is a loss of crucial revenue or other important metrics. In that case, the business may be forced to pay later when it is difficult to raise funding again (significantly if the market eventually cools) or if the company has a sub-optimal culture that is not focused on consistently achieving key business goals.
It used to take a lot of time to build a company worth more than that a billion. If you reached unicorn status in a decade, you were well on your way. Today, the entire startup ecosystem is like a fast-forward movie, with some unicorns being made in a few short years.
Entrepreneurs face immense pressure when balancing multiple funding rounds with rapid business growth within a tight timeframe. It is a difficult task that brings great rewards but also high risks of burnout.
Because this market demands speed, hiring takes place much faster than ever before new hires arrive. With senior management and founders working hard to keep up the market’s pace, it is easy for time to be lost on communicating its vision and values internally and assimilating new workers through training and other social events. It is also difficult to build private relationships with members of your team.
This leads to teams not being as effective as they should, or worse, attrition that results in employees leaving to seek other opportunities (of which there are many in a buoyant market for hiring).
Capital raising is just the beginning of your journey. Next, you need to build a great team. The talent competition is fierce with so many well-funded startups and larger tech companies that experience sustained growth.
Entrepreneurs who seek to hire hundreds of employees after closing a funding round will face many difficulties. This can become a deviation for the founders or senior team. It will also lead to slow progress and extra strain for the existing team.
Manufacture without rigor
Entrepreneurs would agree that raising funds faster and more efficiently than before is a good thing. However, founders are deprived of the chance to have their business plan evaluated by investors in the pre-seed or seed stages.
Although this value depends on the investor’s experience, background, and approach, it can be a great way to get rapid feedback. It can save entrepreneurs money and time in some cases. They will iterate on their ideas before they commit capital.
Establishing product-market alignment is a critical moment for any entrepreneur. It is a crucial moment for every entrepreneur to establish product-market fit. This allows you to raise large amounts of capital and proves that it is worthwhile to invest many more years in building your company.
The product-market fit was a common goal in the past. This was often possible with minimal capital. It was a battle and a lot of hard work that the founders had to overcome. They learned a lot and built a viable go-to-market strategy that they could scale with more capital.
With lots of capital in the early stages, founders can spend large amounts on customer acquisition. They can also take a more scattergun approach. It is common to sell to first customers in different verticals and with unique use cases. This can look like a product-market fit. However, it does not provide a solid foundation for building your go-to-market strategy.
Despite these traps, startup entrepreneurs will never be able to forget a better moment to raise capital. These traps can easily be avoided if you plan well and are disciplined.
Don’t listen to the noise. Look after your mental and physical well-being. Create a Plan A for a world without as much capital. And surround yourself with smart people you trust who will help you navigate the challenges.