Fund Raising is a Means Not an End

Not all that glitters is gold
William Shakespeare

For many entrepreneurs “raising money” has replaced “building a sustainable business” as their goal.  That’s a big mistake. When you take money from investors their business model becomes yours.


One of my ex students came out to the ranch to give me an update on his startup. When I asked, “What are you working on?” the first words out of his mouth was his fund raising progress.  Sigh… What I should have been hearing is the search for the business model, specifically the progress on product/market fit, but I hear the fund raising story first at least 90% of the time.  It never makes me happy.

shutterstock_2694848Entrepreneurs need to think about 1) when to raise money, 2) why to raise money and 3) who to take money from, 4) the consequences of raising money.

It all starts with understanding what a startup is.

What’s a Startup? Just as a reminder, a startup is a temporary organization designed to search for a repeatable and scalable business model.  It’s worth parsing this sentence:

•  Temporary Organization: The goal of a startup is not to remain a startup. The goal is to scale.  (If you don’t have scale as a goal then you shouldn’t be raising money from angel or venture investors, you should be getting a commercial or government small business loan.)

•  Search. Although you believe your idea is the most brilliant innovation ever thought of, the odds are that you are wrong. If you raise millions of dollars on day one, simply executing the idea means you’re going to waste all those dollars attempting to scale a bad idea.

•  Repeatable: Startups may get orders that come from board members’ customer relationships or heroic, single-shot efforts of the CEO. These are great, but they are not repeatable by a sales organization. What you are searching for is not the one-off revenue hits but rather a repeatable pattern that can be replicated by a sales organization selling off a pricelist or by customers coming to your web site.

•  Scalable: The goal is not to get one customer but many – and to get those customers so each additional customer adds incremental revenue and profit. The test is: If you add one more sales person or spend more marketing dollars, does your sales revenue go up by more than your expenses?

•  Business model: A business model answers the basic questions about your entire business: Who are the customers? What problems do they want solved? Does our product or service solve a customer problem (product-market fit)? How do we attract, keep and grow customers? What are revenue strategy and pricing tactics? Who are the partners? What are the resources and activities needed to make this business happen? And what are its costs?

Who to take money from?
First, decide what type of startup you are.  If you’re a lifestyle entrepreneur or a small business, odds are the return you can provide is not what traditional angel or venture investors are looking for.  These types of startups are better suited to raising money from friends, family, commercial and government small business loans, etc.

If you’re a scalable startup, you want to spend small amounts of money (seed capital) as you run experiments testing your hypotheses. Why small amounts? No startup ever spends less then it raises. And at this early stage you’ll be giving up a larger percentage of your firm to investors. A seed round can come from friends, family, Kickstarter, angels – and most importantly, early customers.

These sources are a lot more forgiving of iterations and pivots than later-stage venture-capital funds.

When to raise money
In a Lean Startup, the goal is to preserve your cash until you find a repeatable and scalable business model. In times of unlimited cash (internet bubbles, frothy venture climates) you can fix your mistakes by burning more dollars. In normal times, when there aren’t dollars to undo mistakes, you use Customer Development to find product-market fit.  It’s only after you have found product-market fit (value proposition – customer segment in the language of the business model canvas) that you spend like there is no tomorrow.

Don’t confuse “raising money” with “building a sustainable business.” In a perfect world, you would never need investors and would fund the company from customer revenue.  But to achieve scale, startups need risk capital.

Raise as much money as you can after you have tangible evidence you have product/market fit, not before.

The consequences of raising venture money
The day you raise money from a venture investor, you’ve also just agreed to their business model.

Here’s a simple test: If you’re the founder of a startup, go to a whiteboard and diagram how a VC fund works.  How do the fund and the partners make money? What is an IRR? How long is a fund’s life? How much will they invest in the life of your company? How much do they need to own at a liquidity event?  What’s a win for them? Why?

There are two reasons to take venture money. The first is to scale like there is no tomorrow. You invest the dollars to create end-user demand and drive those customers into your sales channel.

The second is the experience, pattern recognition and contacts that great investors bring to the table.

Just make sure it’s the right time.

Lessons Learned

  • Fund raising is a means not an end
  • Preserve your cash until you find a repeatable and scalable business model
    • Focus on product – market fit
    • Run small experiments testing your hypotheses
  • Raise as much money as you can after you have tangible evidence you have product/market fit

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19 Responses

  1. Start ups is hard work! And money is not going to solve your problems! Great lesson!
    Obrigado, from Brazil!

  2. Very timely Steve. It’s a bit like the celebrity culture we now live in. A kind of ostrich mentality that once you get money (or celebrity status) you have made it.

    Few startups who seek investment realise that you are not just ‘marrying’ the money, it comes with a whole ‘family’ of expectation!

  3. Doing customers development and looking for product/market fit is not free. To do a good job you need to attract 1 or 2 good professionals: developers, designers etc. providing a minimum wage (depending on your location it can be a nightmare, due to scarce qualified resources and competition*). Moreover, if you are full time dedicated to you business you have no incomes. The amount of money needed in this seed phase is much more than the so called “family and friends” or glamorous “love money” (unfortunately my friends cannot lend me $100k multiples). If your student is in this “seed” phase it sound normal that he focuses on raising seeds funds to stay alive and provide enough stability to his team during this product/market fit search period.

    Raising seeds funds is an issue. It is a full time job. You have to be rejected 50 times before succeeding (if you succeed). During that time you cannot work on your business and the less you work on your business the less you can demonstrate traction to investors…

    Where are the seeds?????

    • Good points Luc – I agree. I think Steve is talking more about VC investment here. He does mention that seed funding (small amount, which I assume he means a few hundred thousand) can be used for customer validation (prove product market fit). Of course, when you have achieved PM fit with seed funds from angel or FFF you have derisked the venture quite a bit and can ask for significantly more money from VCs for significantly less equity.

    • Sry I have to disagree on the “product market fit testing”-Part of your comment.
      Below is a link for a video, These are STUDENTS, they spent about 1200$ and if i look at what they did it’s pretty amazing.

      The only thing left to say is: watch and be humbled,

      • Thanks for sharing this vid Marc, these students are amazing indeed!

        5 men full time during 6 months it is not exactly what I call “free”,
        moreover they just did the market and technology risk validation, lets give them 6 months more to do product market fit including knowing better their distribution channels, pricing, branding, user adoption etc.

        Starting a business from university is without any doubt an advantage, its easier to build a team and students can work without being paid for a while.

        I should have mentioned in my previous post that I was talking about software development that might require more time in iterative loops to reach a high quality product. Building a simple electronic device doesn’t involve the same process and might be quicker to validate some hypothesis. Moreover consumer software development require experienced people able to analyze, create and execute. These people are rare at the moment. What is rare have a high price.

        Look for the Peter Hinssen’s paper “Startups Are NOT Glamorous – They Run on Fear” you’ll understand what I mean.

  4. Steve, Thanks for the very succinct and timely reminder.

  5. […] Serial entrepreneur Steve Blank is the author of Four Steps to the Epiphany. This story originally appeared on his blog. […]

  6. Well said.

    The two reasons to raise venture money make sense from the entrepreneur’s point of view. But the whiteboard exercise you mentioned should bring home the point that even after discovering a repeatable business model, some business models just don’t make sense from the VC’s point of view. They’ll never scale big enough fast enough to give the returns needed. Even if the entrepreneur needs dollars to create end-use demand or needs the experience and contacts that an investor could bring.

    Just because someone is hungry and “will work for food” doesn’t mean they’ll be a good employee.

    • After re-reading, here’s an edit to my comment – Steve does mention this in his phrase “first decide what type of startup you are”. I’d argue that this is a discovery as much as a decision. When you discover your business model, you’ll discover that this often defines what type of business you are.

      And shout out @bovall for the phrase BM Validation. We need more of that!

  7. Very useful and — for me- timely essay.
    However, it’s “All that glisters is not gold”
    from The Merchant of Venice. — Paul

  8. Just a quick question for the simple test, why VCs focuse on IRR (Internal Rate of Return) instead of NPV (Net Present Value)?

  9. Dear Steve,
    I have not seen a post so succinct and useful like this one for startups raising money and building a scalable venture. We raised our Series A and when went to the market for Series B, VCs ask tough questions on the “repeatability” of your sales.
    The only reason the VCs are going to give you money is, if you have a control on the complete customer funnel. You need to prove that you can spend x$ on each part of the funnel and that would return your x + y$. The attractiveness for a VC would increase multifold, if you can show that this x can be made 10x in no time.
    If we think from their perspective, all that they got is money. If you have a strong hypothesis, where this money can churn more money fast, then its the ideal situation for them. And typically if you control your sales process, then everything else would fall in place!

  10. Also important to not mistake VC money for BM validation. Se this quote from Sweden’s most spectacular failure (160 MUSD) on the day of their launch (6 months before going bust):

    “Our strong investor base offers a solid foundation for The fact that such international investors have invested in reflects the power of our business model and the brand,” said Patrik Hedelin, Executive Chairman.

  11. Thank you!!! 🙂 Thank you!!!

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    Thank you!!! 🙂 Thank you!!!

    Thank you!!! 🙂 Thank you!!!

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    Thank you!!! 🙂 Thank you!!!

    Thank you!!! 🙂 Thank you!!!

    Thank you!!! 🙂 Thank you!!!

    James Dean Waryk




  12. […] “this doesn’t feel right” was validated when I read Steve Blank’s excellent post called “Fund Raising is a Means, Not an End.” Steve and I must be of like mind because the first sentence of his post is, “For many […]

  13. Great post about what the focus really should be. For some reason far too many entrepreneurs think that money is the end all, cure all. But, the time spent fund raising is (and should be) such a small percentage of what makes a business a success – yet, so many put so much emphasis on it – even on our side of the equation. In the end, money is not even a means – it just may help you (if you let it) accelerate your start up – nothing more.

  14. […] Steve Blank is the author of Four Steps to the Epiphany. This story originally appeared on his blog. Reference/Original Post: […]

  15. […] guru and author of The Startup Owner’s Manual, Steve Blank wrote a great blog post this week on raising money titled “Fund raising is a means not an end” and I couldn’t agree […]

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