5 learnings from startup failure and success: fundraising.

This is the first of a three-part article about startup success. If you haven't yet read part one, you'll find it here. If you want a shortcut to the lessons, you can find them in this Twitter thread.

At some point in 2017, on a day that my subconscious has tried to forget, I realised that the startup I had launched two years earlier was failing. It was hard to accept. As founders, we had been incredibly sure of ourselves. We had also raised over $3m in funding. Yet here we were, faced with the uncomfortable truth that things hadn't worked out.

Wearing failure like a badge hasn’t come as naturally to me as it seems to do others, but I believe I've learned more from that failure than I have from any success. Of course it's harder to repeat a success than avoid a mistake. Mistakes are events that can be identified. They happen. Successes, on the other hand, develop over time. They're a blend of skill, timing, circumstance, and luck.

If failures are such useful tools for learning, though, it's ironic, but perhaps not surprising, that so little is written about them. Failed startups tend to disappear quite swiftly from LinkedIn profiles. On the other hand, what can you learn from someone announcing a funding round or exit? Not much. (Although don't get me wrong, we'll definitely talk about our successes too!)

Here at DQventures, we help first-time founders launch startups. For our founders, knowing what not to do is every bit as important as drawing on past success. To that end, this is the first of a series of posts about learnings, not just from wins but also from losses. If you've learned a lesson the hard way and you're willing to share, I’d love to tell your story too. Let's connect.

These are some of my most valuable lessons to date:

1. Don't raise money too soon.

It's easy to get carried away with the idea of raising "venture capital" for your idea, but it's important to distinguish between the many different types of investor. Some, of course, are professionals. They are experts at what they do. They understand the risks, and in some ways, they can help validate what you're doing. Others are more naive, perhaps first-time, investors: the fabled "friends, family and fools", to whom an investment is little more than a bet. It is far easier to raise money from these inexperienced investors, but that doesn't mean you should do it.

It's harder to convince experienced investors because they know what they're doing. They can identify exceptional investment opportunities, and they understand how likely it is that you will fail. Rejection from them is not a bad thing. It can help you reevaluate what you're doing.

How sure are you, really?

In contrast, friends and family may give you money purely because they believe in you. In doing so, they aren't helping you as much as you might think. I know from experience that losing the money of friends and family can be very uncomfortable. If you're like me, you'll want to pay it back.

My advice, whoever you raise money from,  is to think of equity investment like a loan. You need to be certain of success before accepting it. If you aren't, don't take the money. Don't spend someone else's savings on your business, if you wouldn't genuinely be willing to spend your own.

2. An MVP is not your product!

Too often, founders throw around the term, "MVP", without actually understanding what it means. An MVP should be the absolute minimum you can do to create proof that your business has legs. It should not be the first version of your product; it should create the proof and the insight you need to be able to start building.

I'll give you two real-life examples, starting with someone who did it right:

• Richard Green is the founder of event marketing startup, evvnt. Although it has become much more, evvnt began as a tool that enabled event managers to improve their marketing efficiency. Rather than promoting events by listing them manually on dozens (if not hundreds) of websites, event managers could us a single tool. They could enter their event details once, via a simple form, and evvnt's software would post them "automatically" onto all appropriate sites and apps, modifying the information into the required format, and pushing it out to the relevant audience. This could save hours of someone's time for every single event. Pretty clever. The beauty of Richard's MVP, however, was that it was little more than a web form. Whenever someone entered their event details, the form would send the information to Richard's team in India. The team would then post the details manually onto the designated sites. Essentially, Richard had no tech. He was able to raise money, however, because his MVP created proof that there was a market.

• James Green (me, and no relation to Richard!) did things the wrong way. I had already broken rule number one by raising money before I had created proof. I didn't know any better. I then broke rule number two by using that money to hire a development team and build the first version of my app. This I called, you've guessed it... "my MVP". The purpose of the app was to connect hourly workers, like cleaners, bar staff, and drivers, to business owners and managers who needed to fill shifts. Looking back, rather than spending investors' money on building a slick-looking mobile app, I should have worked out how to simulate the marketplace by matching and placing people into shifts manually. Albeit not scaleable, this would have provided invaluable lessons about the challenge at hand. Our approach created proof that our tech team could build an elegant mobile application. It didn't prove that our talent marketplace had legs. By the time we launched, we found ourselves with a lot less money in the bank, a heavy burn rate, and a distinct lack of users and “product-market-fit”.

When you design your MVP, don't think about the product, think about the proof you're trying to create.

3. Raising capital does not validate your startup.

via GIPHY

Looking back on the various emotions of my startup experience, the highest points often came when I raised money. When clever, experienced people chose to back my venture, it felt like a massive win.

I remember one call with a fund in London. I stood on the balcony of our Singapore apartment, Anna inside with our newborn baby, Ella, while I waited for the investment committee's decision. I literally punched the air when they said they were "in". I couldn’t wait to get off the call, so I could tell Anna and the team the good news. As anyone raising money may know, it's a great feeling - especially with a lead investor, which is much harder to come by than a co-investor. This deal effectively secured our company another year of runway. Surely success would follow?

I now know that this IC's decision did not validate our business, nor did it take away any of the pressure to deliver. It bought us time, of course, and enabled us to invest in resources, but it was simply part of the journey. It was not the outcome.

If the most exciting moments of your startup journey are your capital raises, something is wrong. True validation should come from users and customers, not from investors.

4. Create proof that removes your own doubt before convincing others.

via GIPHY

No investor in their right mind wants to give you money so you can prove whether or not your business works. You shouldn't want that either.

When it comes to raising capital for a startup, there is only one person a founder should convince. Themselves. Nobody else has as much data about an investment decision, and no-one should be better placed to judge a company’s chances of success. Raising funds for DQventures has been fun because I am genuinely convinced it will do well. I would encourage all future founders to think the same way. If you're in doubt, don’t raise. Before you try to convince an angel or VC to part with their funds, figure out what's causing you concern. Once you've defined your weaknesses, decide how you can create more proof, and regain your conviction.

These days, when I speak to budding founders, this is what I say:

“Ask yourself, in your heart of hearts, how sure you are that this will work? Are you truly at 100% confidence, or is there more you can do to de-risk? If it’s the latter, go away and do it before you ask for money. There are few feelings worse than telling an investor their money is gone.”

5. Traction, traction, traction.

As Mikael Krogh from Investigate VC once said to me: when fundraising, there is one factor that is more important than all other factors combined, traction.

If you can prove that customers will pay for your product, show there’s a large market, and demonstrate that you can deliver at scale, you’ve achieved more than 99 per cent of your peers.

This doesn't mean that raising capital pre-revenue is not possible. It most definitely is. Many companies, of course, don't make revenue until years after they begin operating. If you're thinking about launching a business yourself, however, don't focus too much on your product. Demonstrating there's a market that's willing to use, and ideally pay for, what you've conceived should be your number one priority.

From my experience as both founder and investor, I've been surprised by just how little the product seems to matter. Most investors don't even want to see it. Once they've understood the problem you're solving, most will simply skip through your slides until they get to traction. If your user base is growing at 5-10% week-on-week, you can expect to receive some term sheets. If not, you're probably going to find it hard.

As one VC I know wrote:

"Venture capital is 99% finding ways to say no, and 1% begging founders to take my money."

It's all about traction.

Read the next instalment here in Part 2.

Photo and illustration credits:

– Jon Price from Drive Creative Studio
– Mehdi from Unsplash
– Andrea Piacquadio from Pexels