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Why You Shouldn’t Raise Too Much Capital Before Finding Your Product Market Fit?
Seeing a lot of startups closing big rounds in the pre-B stage which is great for the startup ecosystem but it seems to be getting very frothy and I wanted to share my experience from raising way too much capital for my previous company Shyp prior to finding product market fit.
For starters it’s really hard as a founder to see your peers or competitors raising massive rounds and not to do it yourself. I got caught up in this trap and looked at funding rounds as a gauge of success.
This is a trap unless you have product market fit. Taking on lots of capital at big valuations puts so much pressure on yourself & raises expectations for everyone involved in your company. It forces you to hire faster, spend more on S&M, build more product features etc.
If you haven’t validated you have something your customers love and you can scale to produce the expected venture return this can be (and was for me) one of the nails in your coffin.
Without having product / market fit extra capital forces you to scale something that is not yet working. Constraints are one of the main advantages a startup has. Stay as small and scrappy for as long as it takes to find that fit. A startup can do this when an incumbent can’t.
After shutting down Shyp and starting @AirhouseHQ we had the opportunity to raise a $10M “seed” but chose not to because that would have forced us to scale up the team way too fast and limit the customer / product discovery even though we had a pretty good idea of what to build.
Turns out that was the right choice. We raised our “seed” w/ a fair valuation in small chunks based on what we needed for the next year+. It allowed us to keep expectations with our investors and our team low until we found our fit (which we now have and are scaling up).
Stay safe out there and remember you can say no when someone offers you capital. You know your business better than anyone else and it’s important you are honest with yourself at which stage you are at.