Thursday, March 3, 2016

The Contractor Startup --Why this gives the investor pause

I hear many entrepreneur pitches and the one point that stops the conversation cold comes when the entrepreneur says he can start building the business just as soon as he raises funding.  He goes on to explain why he can't do anything unless he has funding.    An investor hears that the entrepreneur and his team can't (won't?) build the product unless someone is paying them and apparently there's no customers to pay the team.  Again, the team can't (won't?) sell the product unless someone is paying them.

I call this type of business-- the "salaried startup".  They only work when money is available to fund the process.  Bootstrapping, sweat equity, and doing it for the passion just aren't in the mix.  If the investor asks for traction or other evidence of progress the excuses fly fast and furious--a thousand reasons why that's just not possible.  The investor then imagines this conversation at a post investment meeting and hears "I can't grow sales unless you give me more money to hire more people," or "I can't build more product unless you give me more funding."

At scale, this is certainly true. In a seed stage startup this is certainly not true. The investor is looking for a team that is building and the growing the business now.  It may grow slowly but it is moving forward.  In the early days the founders are building it and selling it.  They're not waiting for someone to pay them to do so.  Those who take that path are "contractors" not "entrepreneurs".

You can start building your startup now.  You can grow it with or without funding.  If the fully funded startup is your only path forward, you'll find fewer investors willing to climb aboard.

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