This is the only reason startups should raise venture capital

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This is certainly the question I get most often: “How can I get the money I need to fund my startup idea?”

And that’s the one I answer the least, because there’s usually something lurking behind that question. When entrepreneurs come to me with this question, experience has taught me that they are looking for a shortcut to the long, painful and expensive fundraising process. But there isn’t.

My thing is not to help entrepreneurs raise funds. There are a million different resources, including venture capitalists themselves, that are better equipped to help a smart entrepreneur figure out how to go about it. find money for their startup idea.

My thing is to help entrepreneurs create startups that are better equipped to Craft money, generating income and making profits. I’ve built and sold businesses with and without investor funds, so I’m well versed both ways. And I can tell you that fundraising and making money are two completely different goals.

In fact, fundraising isn’t even a goal at all, it’s just the first step on a long journey with no guaranteed results. So I always prefer fundraising as a last resort – a path to take only when that path is absolutely necessary and all other paths are dead ends.

So how do you know when it is?

There are a million reasons to think you need to fundraise

Like I said, I get the “How can I get money” question often, about once a week. And it almost always comes with a bunch of reasons why raising any amount – from a few thousand dollars to a few million – would propel the idea into the stratosphere of startup success.

But in any case, and I mean EVERY CASE, you can read between the lines of any given reason and it becomes: “I don’t have access to the money I need to launch the product I want to launch.”

And when you peel away the layers of this declarationit can still be distilled to: “I want to build a polished product and the infrastructure to sell it before I know whether the product is viable or not and whether the market will accept it.”

In other words: “I’d like to gamble with someone else’s money.”

Then you will forgive me for not having accompanied them on this path.

The best question and the only correct answer

Every once in a while I get the best wiser question: “Should I raise funds for my startup?

And there’s really only one time I’ll say yes, and it’s almost always totally unique to the idea, the founding talent, the problem, and the proposed solution. It’s here:

  • If there is a problem that is broad, universal, and painful enough to affect nearly every business and/or every consumer (preferably both), and…
  • If there is an existing solution, and in particular an incumbent company, that has lost touch with solving the problem in a technically advanced, cost-effective, and customer-satisfying way, and…
  • If there are several new entrants to the market to solve this problem in an entirely different way, and…
  • IF the person asking the question has a solution that is new, at least somewhat proven in the real world, and better than both the existing solution and all new solutions…

So yes, it’s time to raise funds.

Here’s why these requirements are important:

  • If the problem is niche, solving it does not require investors’ money, as there is a low barrier to entry. Start by solving the problem manually, using your competitive advantage to outrun the small competition that exists in this small market.
  • If there is no existing solution or incumbent, you have an open market. Start generating revenue with a low-cost solution to prove viability.
  • If there is no competition, you must first prove the viability of the new solution, establish a beachhead market, and then raise funds.
  • If the first three reasons are true and you can’t show quantifiable evidence that your solution is significantly better than the rest of the new solutions, no investor is going to stake your solution when they can just as easily stake another new solution. more experienced.

Sometimes the startup game is an arms race, and these are the ventures that are usually the riskiest but also offer the highest potential reward. This is what investors are looking for. And those four points are questions of investability – what investors will judge your idea, your product, and your business on.

However, that doesn’t mean that if you can’t satisfy these four reasons, your idea is terrible. Rather the opposite. These IFs are not doors, they are opportunities. There are all sorts of ways to turn these opportunities into milestones, even generating revenue and making a profit along the way.

That’s what I help people do. Because that’s what starting a business should be.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.

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