Entrepreneurs often fall into the trap of chasing after VC funding while failing to explore the strategic options that might be available to them.
We have become accustomed to reading the fantasy stories posted on TechCrunch so it’s become commonplace to believe that raising from a brand name VC is the right thing to do.
The reality is that VCs exist to provide rocket fuel when needed and their early stage funds often exist to enable their late and growth stage funds to ‘see the flop’ when more funding is needed as start-ups mature.
For all the noise around capital raising, I’m surprised how few entrepreneurs raise money from strategic sources during the early stages of their business.
Strategic sources are investments where your investor is able to benefit themselves from the products or services you create. In other words, they double up as an investor and a customer.
If you were a manufacturer of tyres, would you rather Mercedes-Benz invest in your business, or a bank invest in your business?
Taking investment from a source that doubles as a customer provides you with some important benefits:
- Feedback: There is no faster way to find product market fit than to have your investor be your customer as well. The feedback loop is fast and transparent as both companies have an alignment of interests.
- Credibility: If your investor is your customer and they happen to be a large trusted company or corporation, this can often bring significant credibility to your offering as larger competitors are likely to trust your product if they see their counterparts using it as well.
- Speed to market: If your investor doubles as your customer you can often gain traction quicker than competitors who raise funds then have to find customers.
- Income: If your business is going to help your investor/customer generate revenue or reduce costs, then you can generate income from your investor. If you raise from a VC this wouldn’t be possible.
Furthermore, the job of an investor is to generate returns for their shareholders.
Corporations often have different goals and agendas and will often take a more strategic approach to investments, rather than viewing them from a purely financial perspective.
Sometimes the best scenario is to raise funds from sources that are strategic as well as financial.
You might want to raise funds from a strategic source, get product market fit, and then raise from a VC.
There is no right or a wrong, all I’m saying is that you should think outside the box when considering your source of capital.