Daniel's notes on The Customer-Funded Business

"The fact is that the amount of money startups raise in their seed and Series A rounds is inversely correlated with success. Yes, I mean that. Less money raised leads to more success. That is the data I stare at all the time."— Fred Wilson of Union Square Ventures

Most of the time, the Plan A that you have so lovingly conceived is unlikely to work, as most any experienced early-stage investor, whether a VC or a business angel, will tell you. Do you look forward to explaining to your investors why your Plan A didn't work, as you ask them for more money for your newer, brighter, and inevitably still-optimistic Plan B? I don't think so!

Peter Drucker: "If a new venture does succeed, more often than not it is: • in a market other than the one it was originally intended to serve • with products and services not quite those with which it had set out • bought in large part by customers it did not even think of when it started • and used for a host of purposes besides the ones for which the products were first designed."

• Third, making do with the probably modest amounts of cash your customers will give you enforces frugality, rather than waste. Having too much money can make you stupid and lets you ignore your customer! Having less money will make you smarter, and will force you to run your business better, too.

• Fifth, focusing your efforts to raise cash from customers who are willing and eager to buy from your yet-unproven company is likely to mercifully put to rest a half-baked or not-quite-right idea that requires more development--a pivot--in order to hit the mark.

• Finally, there's freedom! Gaining one's freedom is high on every entrepreneur's priority list, and the best source of freedom- even better than cash in the bank-is positive cash flow! And with the magic of customer traction and the cash flow it brings, you'll sleep better, too!

there are significant drawbacks to raising capital too early: 1. A distraction: Raising capital often requires full-time concentration, but so does starting an entrepreneurial business. One or the other will suffer when investment capital is sought. Why not raise money later when the business is less fragile? 2. Pitching vs. proving merit: Nascent entrepreneurial ideas, however promising, always raise numerous questions. Proving the merit of your idea (to yourself and to others), based on accumulated evidence and customer traction, is much more convincing than using your own wisdom and charm to pitch its merit.

Drawbacks continued: 3. Risk: The further you progress in developing your business, the lower the risk, as early uncertainties become more certain. Less risk translates into a higher valuation and a higher stake for the founding team. 4. Baggage: The terms and conditions attached to institutional capital are (for good reason) onerous, as investors seek to protect themselves from downside risk. The further along the path, the less onerous the baggage. 3. Difficulty: raising capital, even in the best of times for the best aventures, is a difficult task! Why make it even harder by trying to do it too early?