Startups That Chase Big Investment Rounds Are Focusing on the Wrong Thing Forget fundraising. Build your customer pipeline instead.
By Scott Brown
Opinions expressed by Entrepreneur contributors are their own.
In season 2, episode 1 of the television show Silicon Valley, protagonist Richard is sitting in a bar with Javeed, a one-time successful startup founder who is now broke and alone. After Javeed learns about Richard's series of progressively increasing funding offers, he recounts his own tale -- one of bloated funding, reverse vesting and a lack of trigger clauses. Richard asks Javeed why he let his Series A round reach such a high valuation, causing Javeed to realize that he would still be CEO of his company if investor expectations had been tempered, including a lower valuation.
Related: For Entrepreneurs, Venture Capital Is Not Always the Best Option
Beefed-up investment rounds hold the top-tier level of prestige in the startup world. After starting their businesses, many founders make a beeline for the closest angel or VC fund to close on the first of many investments, viewing each round as the finish line of its own race. But, what isn't discussed enough in the startup world is the importance of a laser-focus on developing a pipeline of real customers -- the key to long-term success and revenue.
The appeal of going for the venture funding route is obvious. Other than the prestige associated with it, startups are typically strapped for cash and the injection of money provides an accelerated path toward scaling. But, as Jawbone showed us this summer when it declared bankruptcy, the downsides of rapid funding rounds have the potential to be hugely damaging. Dilution and loss of control are real concerns, and the risk increases as more equity is sold to more investors.
I have very little doubt that, at least in part, the media holds a key role in making fundraising such a popular route. "Lyft just closed a $600 million round of new funding" is unquestionably a sexier headline than one disclosing other milestones, such as customer metrics or new partnerships. And we, as media consumers, gobble it up.
Related: To Raise or Not to Raise, That Is the Question
But, ultimately, the key to building a steady business that can survive in the long-term is generating revenue through new and returning customers, not fundraising. After launching GoPro in 2002 with $10,000, founder Nick Woodman grew the company to a $2.25-billion valuation over 10 years with only three funding rounds. Such a strategy only works when companies invest resources into developing a deep understanding of what the customer needs. In the case of GoPro, that was an attachable camera for sports.
As an eight-time startup founder, I have successfully built companies with and without venture investments, but maintaining the discipline to build a business with customer dollars has always been the winning formula. Building a strong customer pipeline allowed me to create a growth trajectory based on revenue and P&L, instead of money that didn't actually belong to me.
Today, in my post-founder life, I have the honor of mentoring the startups that come through the UpRamp Fiterator. All mid-stage startups, the cohort is looking to make deals in the broadband-wireless-video industry. In this year's cohort is DeviceBits, a platform using AI and machine learning to improve customer experience journeys, targeting a notable pain point of the connectivity industry.
Related: LinkedIn's Reid Hoffman to Entrepreneurs: Raise More Money Than You Need
DeviceBits has constantly impressed us (and executives in the industry) with its unmatched focus on product-market fit and the customer. Its founder and C-level team not only knew each other and worked together for years before founding the business, but they also brought pain points they were already aware of to the development of the platform.
With nine-digit fundraising rounds dominating the headlines, it's imperative that founders remember that this is confirmation bias in action. Much like social media does on a personal level, fundraising headlines showcase the highest highs and only one aspect of the company, but say nothing about the business's health in the long run. In the meantime, for every one of those headline grabbers, there are hundreds of other startups solving real-world problems for real-world customers, quietly but effectively.
The fundraising game is undoubtedly an exciting and an exhilarating one. But, as too many businesses -- and fictional characters -- have learned the hard way, startups need to focus on driving organic growth through a strong customer pipeline. And that only comes from developing a deep understanding of the market and real customer pain points.
Related Video: How Much Money Should Entrepreneurs Really Raise?
