7 ms·

Never raise money before launching a product

50 points by jsherman76 9y ago

trhway 9y ago
>When you are first building your platform or product, you need to focus on a couple of things: The technology, putting together a great team, user acquisition and gaining traction, and hopefully earning revenue as well. >Once you have all four of these things, you will be in a much better negotiating position when it’s time to talk to investors about raising a round of funding. until of course seeing your product, revenue and traction would only worsen the impression :) Watching how some acquaintances have been showered with money (investors have been borderline begging to get in, and they were right - one is already a unicorn in just a few years with strong revenue and pile of cash in bank) just upon starting i can't even imagine how a better deal is possible :) Though it is B2B where to make a Fortune 500 sale in the 1st/2nd year, you have to start selling well in advance, just from the get go, well before MVP(if MVP even makes sense at all, instead there is POC)and you can't do that on a shoestring budget. Development too must be scaled pretty quickly to be able to deliver of what was already sold. There is no time to find a business model, for market exploration, etc. typical B2C startup staff. The people here come with experience, they know the field, know what they want to do.
danbmil99 9y ago
This advice may make sense if you're either independently wealthy, or young enough and unencumbered enough with life's obligations that you can afford to work for a year or two without a salary. Actually, I think Silicon Valley uses this as a bit of a filter. It filters for people with a background and social network where a couple hundred thousand dollars, or working for a year or two without pay, are not a big deal. Exercise for the reader: what cohort of people does this filter exclude?
- throwaway2016a 9y ago
  A MVP does not take a couple hundred thousand dollars or years without pay. Many people here on HN have built apps and gotten traction in their free time. The real trick is getting a job where your contract does not try to claim your employer owns things you make in your free time...
  - jonreem 9y ago
    In California at least, regardless of what’s written in your employment contract, you own anything you produce on your own time and with your own equipment as long as it doesn’t directly relate to your employer’s business.
    - jboggan 9y ago
      It's difficult to get something started on the side when you work for Google for that reason.
      - brucephillips 9y ago
        Not really. Can you cite any instance of Google suing a company founded by ex-googlers that wasn't founded on the basis of the work those founders did at Google?
  - Kelbit 9y ago
    Has anyone ever been successfully pursued in court over that? You don't own employees when they're off the clock.
  - mindcrime 9y ago
    The real trick is getting a job where your contract does not try to claim your employer owns things you make in your free time... Just work in a state where state law doesn't allow the "we own your brain" stuff. Those employment agreements don't trump applicable state law. Of course there will always be a bit of subjectivity around the whole thing... as well all know, the law is always a bit non-deterministic until it reduces to a particular case, on a particular day, in front of a particular judge and jury, etc. But from a risk management standpoint, you can rely on some general truths most of the time. For that matter, you could even go with "damn your employment agreement, do it anyway, and just don't tell anybody at $current_employer what you're doing, now or ever". Unless you say or do something to bring attention to yourself, it's probably fairly unlikely that they'll ever pay you any attention at all, especially if you don't "make it big" until after you quit.
- jboggan 9y ago
  I'm currently building an ML-powered debugging tool for automatically correcting code based on error messages. It's actually fairly difficult but doable, and we are working towards getting our first product out in the next few months. It has been difficult supporting ourselves during this phase however since we are both from middle class backgrounds and didn't go to prestigious schools. For years I thought I was smart for turning down Princeton and taking a scholarship to a state school and not having any student loan debt. Now for the first time I see the other side of that decision and think about the connections I could have been making during college and how much easier our current road would be. That early friends-and-family money is really important in getting yourself to a state where seed funding is interested in you.
  - anon_cs493 9y ago
    I'm confused by this anecdote. Princeton has one of the strongest financial aid programs in the world. Why didn't you take the offer? Students do not have to pay tuition if their parents make less than $140K a year. Students receive a full-ride (including tuition, room & board, and a stipend for misc costs) if their parents make less than $65K Sources: http://money.cnn.com/2015/04/01/pf/college/stanford-financial-aid/index.html http://money.cnn.com/2015/04/01/pf/college/stanford-financia... https://www.princeton.edu/admission-aid/affordable-all https://www.princeton.edu/admission-aid/affordable-all Personal anecdote: I recently graduated with zero debt from Princeton (in fact, with a net positive gain in capital) and I come from a upper middle class family.
    - deleted 9y ago
      [deleted]
    - jboggan 9y ago
      They certainly didn't when I was accepted in the fall of 1999. I had enough money in my college fund to pay for 1.5 years of tuition, room, and board at Princeton so getting paid to go to a good state school seemed like a no-brainer. I would mostly attribute it to a middle class mindset of education being a necessary cost to be minimized, rather than a very large investment in your future with outsized returns.
- ThrustVectoring 9y ago
  >what cohort of people does this filter exclude? People unlikely to have the connections and social capital required to get future rounds of funding. There are many venture capital filters that are Keynesian beauty contests like this. Venture capitalists aren't optimizing for funding financially sound businesses. They're optimizing for funding in round N companies that they believe have a good enough chance to get funded in round N+1, and so forth.
revelation 9y ago
Nobody seems to have told Magic Leap.
- adventured 9y ago
  Or Jeff Bezos & Amazon. One of the greatest venture capital results in history (20 people put in $50k each to get it started). The article is far too vague to be taken seriously. There are a lot of segments where you have to take on an investment to get to launch. Tesla and SpaceX were not going to get started on peanuts, they required tens of millions in start-up funding.
  - rokhayakebe 9y ago
    "Tesla and SpaceX," but certainly the significant majority of apps do not require the same level of funding to get started.
  - deleted 9y ago
    [deleted]
gsylvie 9y ago
I would do a small friends & family round pre-revenue. E.g., 8 friends and family @ 12.5K each = 100K. I don't mind if my success makes my friends & family some money. But I'll sure feel bad if I take their money and lose everything. Perhaps that would be motivating... (Note: where I live (BC, Canada), the provincial government offers a refundable 30% tax credit for investments like this, so if I did lose everything, friends & family would only be out 70K).
- jboggan 9y ago
  I wish I could do something like that but my friends and family are not accredited investors, even if they have $10k to give. From my understanding of securities law and compliance it really isn't possible.
  - gricardo99 9y ago
    In the U.S., depending on the state, there may be an exemption for friends & family: https://www.strictlybusinesslawblog.com/2011/08/15/can-a-friends-and-family-round-include-non-accredited-investors-should-it/ https://www.strictlybusinesslawblog.com/2011/08/15/can-a-fri...
    - gsylvie 9y ago
      Exactly! Here's the BC, Canada website on exactly this (British Columbia Securities Commission): https://www.bcsc.bc.ca/For_Companies/Private_Placements/Private_and_early_stage_businesses/#FamilyFriends https://www.bcsc.bc.ca/For_Companies/Private_Placements/Priv...
  - deleted 9y ago
    [deleted]
  - ttul 9y ago
    In the US and most Canadian jurisdictions, friends-and-family can obtain an exemption from the accredited investor requirement. Same with employees.
- 9y ago
hw 9y ago
Quite a few companies have gone down the crypto ICO route to raise funds instead of dealing with traditional investors / VCs, which I think is a great (albeit unregulated) way to raise some money without giving out a huge chunk of your company. It's also an easier way to raise money without having an actual product in hand. It's just unfortunate though that ICOs have a bad rep due to greed and the fact that a lot of the ICOs that happen are scams and will never deliver an actual product.
- ttul 9y ago
  ICOs are hot because they haven't yet been through the full hype cycle. Some time in 2018, there will be an ICOpalypse, and investors will run for the hills. ICOs will then no longer be hot.
- huangc10 9y ago
  It happened today unfortunately. Confido ended up scamming early investors almost $400K. Like you, I like the idea of ICOs but it definitely is a risk. Ink, which was created by Listia (YC alum), is actually trying to help those users who got scammed: https://medium.com/@PayWithInk/ink-airdrop-for-confido-token-holders-54340af8d163 https://medium.com/@PayWithInk/ink-airdrop-for-confido-token...
Kelbit 9y ago
"Never" is far too strong a word here. There's more to the startup world than SaaS. Good luck launching a consumer hardware product without raising money if you're not independently wealthy. Even getting a relatively simple product to mass production is going to take on the order of 12-18 months and 1-2 million: you've got several iterations of prototyping and testing, UL/IEC approvals, set-up at a CM, and the long tail of retail to deal with. If you have something truly innovative, consider adding an order of magnitude to that cost estimate.
- sheetjs 9y ago
  The title is clickbait. The real message is to avoid raising money if you are in a desperate spot. The deals may not be favorable and you need to be able to say no, and you can't say no if you feel desperation.
  - ttul 9y ago
    Nobody ever _wants_ to raise money. You raise money when you _can_ or when you _have to_, in that order. If you're Slack or one of a very tiny number of other startups that are vastly successful because they hit it out of the park on every metric, money raises itself at a price you can't turn down. For everyone else, you raise when you can, or when you have to. And it's not always pretty, because if the future was risk free, you wouldn't be running a startup.
deleted 9y ago
[deleted]
adventured 9y ago
"If you take money too early (and give away a lot of equity), it turns off future investors" That's dependent on who the early investor is. If you sell 1/3 of your company before product launch, to one of the most respected people in the segment in question, you'll lure talent and capital to your shores. A prominent early investor lends vast, instant credibility to what you're doing. They share their reputation with you. Doing a genetics or CRISPR start-up? Sell 1/4 of the pre-product company to George Church and Feng Zhang, get them to be involved in any meaningful manner, and see what happens. Convince Mark Cuban to buy 20% of your pre-product company. Your profile just instantly skyrocketed. Every media outlet in the US will now take your contact and at least listen to your story. Cuban just lent you a tiny piece of his fame and credibility, other major investors will (under most circumstances) immediately take you more seriously. A similar story would play out with a few dozen other big angel investors (with varying degrees of attention & credibility attached, some investors lend more or less of each).
- DrJid 9y ago
  I guess a follow up to this is.. if you had a product, could you then convince Mark Cuban to buy 10% instead of 20%? You still get benefit of having Mark Cuban's name alongside your company while still retaining more of it. Plus, that 10% can then go to future investors. (I think that's what the article was trying to say)
  - rokhayakebe 9y ago
    What percentage of tech companies succeed/ed because of "Big Name?"
    - hodgesrm 9y ago
      Umm, Theranos?
brucephillips 9y ago
"Why you should never raise money on bad terms" is really the point of the article.
- deleted 9y ago
  [deleted]
- ttul 9y ago
  Yes, please tell us how we should never raise money on bad terms. Because it's far better to raise no money, and just go under. Jesus.
- rokhayakebe 9y ago
  They did not enumerate all the reasons, but those are some. Perhaps the biggest is being locked into a product you do not know will gain traction or not. I rather find some traction no matter how small before raising, "derisking" the product a bit more.
tryingagainbro 9y ago
>>You should always focus on building your platform and proving that you can get customers before taking in any money. This way, when you do raise money, you’ll be using it to scale your company, not build it. Great in theory. But who pays my rent, health care and sandwiches for those years? I get that married people with children shouldn't even try. Kids get in the way of working like a slave
DrJid 9y ago
Curious if anyone has experience with this. If you did build a product first, are there cases when having said product can actually harm raising money?
rokhayakebe 9y ago
"It takes money to grow money, not make money."
ThomPete 9y ago
While overly sensationalist and click-batish the amount of people I talk with who raise money before they build their base product in areas that do not require capital or aren't hard problems to solve is quite staggering. But I am fine with people doing that as it means mostly they won't succeed.
mamcx 9y ago
This is a problem elsewhere. For example in Colombia (where I live) is common for "investors" to ask for more than 50% of your company and become de facto owners. Here, a lot of people can't even think in build a startup because lack of cash and troubles getting bank loans. A small investment (for example US 10.000) could lift some of us from the ground! but the investors here are not savvy enough to spread the money among many and reap the profits :(

50 points by jsherman76 9y ago

>When you are first building your platform or product, you need to focus on a couple of things: The technology, putting together a great team, user acquisition and gaining traction, and hopefully earning revenue as well. >Once you have all four of these things, you will be in a much better negotiating position when it’s time to talk to investors about raising a round of funding. until of course seeing your product, revenue and traction would only worsen the impression :) Watching how some acquaintances have been showered with money (investors have been borderline begging to get in, and they were right - one is already a unicorn in just a few years with strong revenue and pile of cash in bank) just upon starting i can't even imagine how a better deal is possible :) Though it is B2B where to make a Fortune 500 sale in the 1st/2nd year, you have to start selling well in advance, just from the get go, well before MVP(if MVP even makes sense at all, instead there is POC)and you can't do that on a shoestring budget. Development too must be scaled pretty quickly to be able to deliver of what was already sold. There is no time to find a business model, for market exploration, etc. typical B2C startup staff. The people here come with experience, they know the field, know what they want to do.

danbmil99 9y ago

This advice may make sense if you're either independently wealthy, or young enough and unencumbered enough with life's obligations that you can afford to work for a year or two without a salary. Actually, I think Silicon Valley uses this as a bit of a filter. It filters for people with a background and social network where a couple hundred thousand dollars, or working for a year or two without pay, are not a big deal. Exercise for the reader: what cohort of people does this filter exclude?

throwaway2016a 9y ago
A MVP does not take a couple hundred thousand dollars or years without pay. Many people here on HN have built apps and gotten traction in their free time. The real trick is getting a job where your contract does not try to claim your employer owns things you make in your free time...
- jonreem 9y ago
  In California at least, regardless of what’s written in your employment contract, you own anything you produce on your own time and with your own equipment as long as it doesn’t directly relate to your employer’s business.
  - jboggan 9y ago
    It's difficult to get something started on the side when you work for Google for that reason.
    - brucephillips 9y ago
      Not really. Can you cite any instance of Google suing a company founded by ex-googlers that wasn't founded on the basis of the work those founders did at Google?
- Kelbit 9y ago
  Has anyone ever been successfully pursued in court over that? You don't own employees when they're off the clock.
- mindcrime 9y ago
  The real trick is getting a job where your contract does not try to claim your employer owns things you make in your free time... Just work in a state where state law doesn't allow the "we own your brain" stuff. Those employment agreements don't trump applicable state law. Of course there will always be a bit of subjectivity around the whole thing... as well all know, the law is always a bit non-deterministic until it reduces to a particular case, on a particular day, in front of a particular judge and jury, etc. But from a risk management standpoint, you can rely on some general truths most of the time. For that matter, you could even go with "damn your employment agreement, do it anyway, and just don't tell anybody at $current_employer what you're doing, now or ever". Unless you say or do something to bring attention to yourself, it's probably fairly unlikely that they'll ever pay you any attention at all, especially if you don't "make it big" until after you quit.
jboggan 9y ago
I'm currently building an ML-powered debugging tool for automatically correcting code based on error messages. It's actually fairly difficult but doable, and we are working towards getting our first product out in the next few months. It has been difficult supporting ourselves during this phase however since we are both from middle class backgrounds and didn't go to prestigious schools. For years I thought I was smart for turning down Princeton and taking a scholarship to a state school and not having any student loan debt. Now for the first time I see the other side of that decision and think about the connections I could have been making during college and how much easier our current road would be. That early friends-and-family money is really important in getting yourself to a state where seed funding is interested in you.
- anon_cs493 9y ago
  I'm confused by this anecdote. Princeton has one of the strongest financial aid programs in the world. Why didn't you take the offer? Students do not have to pay tuition if their parents make less than $140K a year. Students receive a full-ride (including tuition, room & board, and a stipend for misc costs) if their parents make less than $65K Sources: http://money.cnn.com/2015/04/01/pf/college/stanford-financial-aid/index.html http://money.cnn.com/2015/04/01/pf/college/stanford-financia... https://www.princeton.edu/admission-aid/affordable-all https://www.princeton.edu/admission-aid/affordable-all Personal anecdote: I recently graduated with zero debt from Princeton (in fact, with a net positive gain in capital) and I come from a upper middle class family.
  - deleted 9y ago
    [deleted]
  - jboggan 9y ago
    They certainly didn't when I was accepted in the fall of 1999. I had enough money in my college fund to pay for 1.5 years of tuition, room, and board at Princeton so getting paid to go to a good state school seemed like a no-brainer. I would mostly attribute it to a middle class mindset of education being a necessary cost to be minimized, rather than a very large investment in your future with outsized returns.
ThrustVectoring 9y ago
>what cohort of people does this filter exclude? People unlikely to have the connections and social capital required to get future rounds of funding. There are many venture capital filters that are Keynesian beauty contests like this. Venture capitalists aren't optimizing for funding financially sound businesses. They're optimizing for funding in round N companies that they believe have a good enough chance to get funded in round N+1, and so forth.

revelation 9y ago

Nobody seems to have told Magic Leap.

adventured 9y ago
Or Jeff Bezos & Amazon. One of the greatest venture capital results in history (20 people put in $50k each to get it started). The article is far too vague to be taken seriously. There are a lot of segments where you have to take on an investment to get to launch. Tesla and SpaceX were not going to get started on peanuts, they required tens of millions in start-up funding.
- rokhayakebe 9y ago
  "Tesla and SpaceX," but certainly the significant majority of apps do not require the same level of funding to get started.
- deleted 9y ago
  [deleted]

gsylvie 9y ago

I would do a small friends & family round pre-revenue. E.g., 8 friends and family @ 12.5K each = 100K. I don't mind if my success makes my friends & family some money. But I'll sure feel bad if I take their money and lose everything. Perhaps that would be motivating... (Note: where I live (BC, Canada), the provincial government offers a refundable 30% tax credit for investments like this, so if I did lose everything, friends & family would only be out 70K).

jboggan 9y ago
I wish I could do something like that but my friends and family are not accredited investors, even if they have $10k to give. From my understanding of securities law and compliance it really isn't possible.
- gricardo99 9y ago
  In the U.S., depending on the state, there may be an exemption for friends & family: https://www.strictlybusinesslawblog.com/2011/08/15/can-a-friends-and-family-round-include-non-accredited-investors-should-it/ https://www.strictlybusinesslawblog.com/2011/08/15/can-a-fri...
  - gsylvie 9y ago
    Exactly! Here's the BC, Canada website on exactly this (British Columbia Securities Commission): https://www.bcsc.bc.ca/For_Companies/Private_Placements/Private_and_early_stage_businesses/#FamilyFriends https://www.bcsc.bc.ca/For_Companies/Private_Placements/Priv...
- deleted 9y ago
  [deleted]
- ttul 9y ago
  In the US and most Canadian jurisdictions, friends-and-family can obtain an exemption from the accredited investor requirement. Same with employees.
9y ago

hw 9y ago

Quite a few companies have gone down the crypto ICO route to raise funds instead of dealing with traditional investors / VCs, which I think is a great (albeit unregulated) way to raise some money without giving out a huge chunk of your company. It's also an easier way to raise money without having an actual product in hand. It's just unfortunate though that ICOs have a bad rep due to greed and the fact that a lot of the ICOs that happen are scams and will never deliver an actual product.

ttul 9y ago
ICOs are hot because they haven't yet been through the full hype cycle. Some time in 2018, there will be an ICOpalypse, and investors will run for the hills. ICOs will then no longer be hot.
huangc10 9y ago
It happened today unfortunately. Confido ended up scamming early investors almost $400K. Like you, I like the idea of ICOs but it definitely is a risk. Ink, which was created by Listia (YC alum), is actually trying to help those users who got scammed: https://medium.com/@PayWithInk/ink-airdrop-for-confido-token-holders-54340af8d163 https://medium.com/@PayWithInk/ink-airdrop-for-confido-token...

Kelbit 9y ago

"Never" is far too strong a word here. There's more to the startup world than SaaS. Good luck launching a consumer hardware product without raising money if you're not independently wealthy. Even getting a relatively simple product to mass production is going to take on the order of 12-18 months and 1-2 million: you've got several iterations of prototyping and testing, UL/IEC approvals, set-up at a CM, and the long tail of retail to deal with. If you have something truly innovative, consider adding an order of magnitude to that cost estimate.

sheetjs 9y ago
The title is clickbait. The real message is to avoid raising money if you are in a desperate spot. The deals may not be favorable and you need to be able to say no, and you can't say no if you feel desperation.
- ttul 9y ago
  Nobody ever _wants_ to raise money. You raise money when you _can_ or when you _have to_, in that order. If you're Slack or one of a very tiny number of other startups that are vastly successful because they hit it out of the park on every metric, money raises itself at a price you can't turn down. For everyone else, you raise when you can, or when you have to. And it's not always pretty, because if the future was risk free, you wouldn't be running a startup.

deleted 9y ago

[deleted]

adventured 9y ago

"If you take money too early (and give away a lot of equity), it turns off future investors" That's dependent on who the early investor is. If you sell 1/3 of your company before product launch, to one of the most respected people in the segment in question, you'll lure talent and capital to your shores. A prominent early investor lends vast, instant credibility to what you're doing. They share their reputation with you. Doing a genetics or CRISPR start-up? Sell 1/4 of the pre-product company to George Church and Feng Zhang, get them to be involved in any meaningful manner, and see what happens. Convince Mark Cuban to buy 20% of your pre-product company. Your profile just instantly skyrocketed. Every media outlet in the US will now take your contact and at least listen to your story. Cuban just lent you a tiny piece of his fame and credibility, other major investors will (under most circumstances) immediately take you more seriously. A similar story would play out with a few dozen other big angel investors (with varying degrees of attention & credibility attached, some investors lend more or less of each).

DrJid 9y ago
I guess a follow up to this is.. if you had a product, could you then convince Mark Cuban to buy 10% instead of 20%? You still get benefit of having Mark Cuban's name alongside your company while still retaining more of it. Plus, that 10% can then go to future investors. (I think that's what the article was trying to say)
- rokhayakebe 9y ago
  What percentage of tech companies succeed/ed because of "Big Name?"
  - hodgesrm 9y ago
    Umm, Theranos?

brucephillips 9y ago

"Why you should never raise money on bad terms" is really the point of the article.

deleted 9y ago
[deleted]
ttul 9y ago
Yes, please tell us how we should never raise money on bad terms. Because it's far better to raise no money, and just go under. Jesus.
rokhayakebe 9y ago
They did not enumerate all the reasons, but those are some. Perhaps the biggest is being locked into a product you do not know will gain traction or not. I rather find some traction no matter how small before raising, "derisking" the product a bit more.

tryingagainbro 9y ago

>>You should always focus on building your platform and proving that you can get customers before taking in any money. This way, when you do raise money, you’ll be using it to scale your company, not build it. Great in theory. But who pays my rent, health care and sandwiches for those years? I get that married people with children shouldn't even try. Kids get in the way of working like a slave

DrJid 9y ago

Curious if anyone has experience with this. If you did build a product first, are there cases when having said product can actually harm raising money?

rokhayakebe 9y ago

"It takes money to grow money, not make money."

ThomPete 9y ago

While overly sensationalist and click-batish the amount of people I talk with who raise money before they build their base product in areas that do not require capital or aren't hard problems to solve is quite staggering. But I am fine with people doing that as it means mostly they won't succeed.

mamcx 9y ago

This is a problem elsewhere. For example in Colombia (where I live) is common for "investors" to ask for more than 50% of your company and become de facto owners. Here, a lot of people can't even think in build a startup because lack of cash and troubles getting bank loans. A small investment (for example US 10.000) could lift some of us from the ground! but the investors here are not savvy enough to spread the money among many and reap the profits :(