29 June 2009

The Case for Taking a VC's Money (even if you don't need it)

In contrast to our recent posts which tout the advantages of bootstrapping, here is an interesting blog from the founder of SEOmoz and his (generally positive) reasons for taking outside capital from a venture investor:


He points to the ways that taking venture capital has helped him, such as the accountability, networking, metrics and experience that come along with the dollars. He also rightly points out that raising funding takes a tremendous amount of time, and that in addition to money, founders also gain a "boss" that can fire them-- something that many entrepreneurs fail to realize.

But what I particularly like about this post is his discussion on the importance of timing; namely, he was able to bootstrap his firm to a point where he didn't really need the money. This had the added-- and very significant-- advantage of giving him leverage in his discussions and negotiations. It also made SEOmoz all that much more attractive to investors in the first place, and helped close the deal quickly.

This is a common mantra I try to hammer home with startups that I work with, who frequently want to raise money too early. In short, there is nothing more frustrating than spending three or six months fruitlessly knocking on doors; you've got to be ready to raise money, and generated enough momentum on your own such that you are an appealing investment opportunity.

The rather off-the-wall metaphor we often use is that of a train...the burden is on the entrepreneur to get the engines fired up and the train rolling out of the station, at which point investors will jump aboard for fear of missing it. The investors bring the fuel-- I suppose coal, in this scenario-- but they have no incentive to join if the train is stationary. (And in fact, it is in their best interest to watch and wait as long as possible-- an issue we talked about previously in our post titled "Closing Term Sheets Quickly." Is your train moving?

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