Fundraising Part II: Timing And Venture Capital Money

What's up, everyone. This is Alex Lieberman, co-founder and Executive Chairman of Morning Brew. Welcome back to Founder's Journal, my personal audio diary, where I give you, the business builder, the tools you need to think better in order to build better, whether that's building a business, a team, or a new product. Today, I'm talking about how you should think about funding your business or someone else's business, and when it makes sense to take venture capital money. Let's hop into it. So whether you are working at a business that has raised funding and you want to better understand it, or you're an entrepreneur thinking about raising more funding or your first round...Why do you raise money at all?

Why Raise Money? Part 1: You Need Money to Make Money

Right? Why do you not just literally run the business without money? Well, first of all, if you're an early company that's pre-revenue, so you're literally not getting money from customers or advertisers or clients yet, you need money to make money, right? Because say your product is apparel. How are you going to fund the apparel that you order to sell to your customers? If your product is a media business, how are you going to fund the people creating the content that ultimately you're going to monetize through selling it as a subscription or advertising. You're not going to be able to, and so you have to raise money in some way to be able to make money.

Why Raise Money? Part 2: You Need Money to Grow to Profitability 

The other reason you may want to raise money is if you need more money than you have to get the business to profitability. There are some businesses where you simply need a lot of money in order to get to a point where your revenue exceeds all of your costs. So, let's just say you have a very capital intensive business, where you have either machinery or there's a lot of supply chain costs. Even if you have money in the bank, you may not have enough to be able to fund the machinery, the software, the intellectual property that you need to buy, to be able to get your business to a point of driving enough sales to be profitable. Two more reasons that you end up raising money or why it makes sense to raise money. The next reason is that cash can be a competitive advantage.

Why Raise Money? Part 3: Pay for Marketing to Beat Competition 

If you're in a competitive market, there are sometimes things that you can do with your cash to accelerate past your competition. Sometimes cash can be the best accelerant for acquiring new customers, so cash can be used for paid marketing, whether it's paid Facebook ads, Google search ads, Instagram ads, et cetera. Even if you have money in the bank as a business, you may not have enough in order to fund paying for marketing to accelerate your customer base enough to accelerate past your competition. 

Why Raise Money? Part 4: Senior Hires are Expensive

The second reason that cash can be a competitive advantage is if you need to make senior hires, senior hires are really expensive, and you need a lot of money in order to pay for senior hires. You don't realize until you start hiring senior people, just how your money goes when you start hiring them. This is one of the reasons that because morning brew only raised $750,000. We couldn't hire any senior people for a long time. We hired our first senior person probably three years ago, but that was three years into the business. When we first raised the $750,000, we couldn't hire senior people. It was all junior people who are within three or four years of graduating from college because honestly, one senior person, someone sitting on your executive leadership team, all in, could end up making over half, if not more, of that $750,000 we've raised. So if you need big hires to accelerate your business, because you have a business that is really dependent on expertise, on strategy, on planning ahead, you're going to need a lot of money to make those senior hires. 

Why Raise Money? Part 5: The World is Uncertain

The final reason that it would make sense to raise any money at all is even if you have money in the bank, even if your company is profitable, the world is uncertain. We saw that with March of 2020. In March of 2020, Morning Brew's business, probably, I don't know the exact number, but our advertising was down more than 50%. You can't always account for what's going to happen, but you need to plan for unexpected events, for Black Swan events, for events that you could never imagine what happened. And one of the ways you do that is by creating a buffer in the bank, such that if your revenue, all of a sudden, is cut by 50% in a month for one month, two months, three months, six months, you don't go out of business. If Morning Brew was started in March of 2020, we would not have survived as a business. The only reason we survived is because we had existed for three years, we were profitable for many of those years, and we built up a war chest of cash. But one of the ways that you can weather an economic downturn or recession is by raising money to make sure you have enough in the bank to survive if things go crazy. 

Last thing I want to leave you with because I spent some time earlier saying how Austin and I were against raising venture capital, we thought that we would have to sell our souls and that we'd no longer have control of our business. That is not a fair assessment of venture capital. For some businesses. It makes a ton of sense to raise VC money. It may not make a lot of sense for most media companies, but that doesn't mean it doesn't make a lot of sense for all companies. So here are the reasons you would raise VC money. 

Why Raise VC Money? Part 1: Aligned Visions of Business Growth

The first reason is your expectations of how fast you want to grow your business are in line with the expectations of how fast a VC wants you to grow your business. Like I said, a venture capitalist is expecting 10 X plus returns, so they're expecting you to grow your business really, really quickly. So there's a mental model actually in the world of software. So for SAAS companies, software as a service, the model that venture capitalists usually use, their expectation of how fast a software business should grow when it's small, is called T2D3. They expect you, when you're around $2 million in revenue, to triple for two years and then double for the next three years. When you think about that, that is crazy growth. But if you are building a business that you think it is realistic to grow by triple for two years and double by three years, which basically gets you from 2 million in revenue to 100 million in revenue in five years, then it could make a lot of sense to raise VC money and accelerate your growth. 

Why Raise VC Money? Part 2: Your Business is Costly to Build

The second reason you raised VC money is if you have a business that's very costly to build, you may not have a lot of other options. You may need way more funding than what family and friends can provide you, if you have a new business, you may not be able to take out debt because you don't have a stabilized income stream, and so if you have an infrastructure-heavy business, a software heavy business, or a media company where you're buying a lot of intellectual property, you may need to raise VC money in order to literally fund the initial product for your business.

Why Raise VC Money? Part 3: Winner Take All Market

The third and final reason you take VC money is if you are in a winner, take most or winner take all market. There are certain markets markets that are actually defined by network effects, which is a past episode of Founder's Journal that you should check out where, because of the way that the industry or the market is constructed, there's generally going to be one winner and the rest are losers. And in a business where there's one winner and the rest are losers, getting to the first place is incredibly important, it means you need to accelerate faster than a ton of competition out there. If venture capital money, meaning a lot of funding, a lot of strategic guidance, and a lot of support can increase the probability of you being a winner and a winner takes most or a winner takes all market, it can make a ton of sense.

TL;DR

And so that is how you should think about fundraising for your business or someone else's business. These are the scenarios when you should be taking money at all, and then specifically within taking money, when you should think about VC money being the right type of money take. 

I Want to Hear from You

Now, I'd love to hear from you all. We have a ton of new listeners on the show. This month is the biggest month of Founder's Journal, and that's a followup to last month being the biggest month of Founder's Journal. So whether you're old or new, write in and let's chat. Send an email to alex@morningbrew.com or DM me on Twitter with any thoughts or questions you have about the show.

Also, get ready because next week on Founder's Journal, we're doing things a little differently. We are dropping our first mini series called Accelerate Your Career, where we'll be bringing back some classic episodes you loved, or if you're a new listener, maybe you haven't heard before, and some new episodes you won't want to miss. I'll talk about everything from getting unstuck in your career to the secrets of being a top performer. Plus, instead of just dropping one episode at a time, we be giving you two episodes on Monday, Wednesday, and Friday. Follow along to map out your path to success in your career.

Credits

Founder's Journal is produced and engineered by Dan Bouza. Our associate producer is Bella Hutchins, Alan Haburchak is our Executive Producer. And I'm your host, Alex Lieberman. As always, if you enjoyed, please let others know who you think would enjoy the show as well. Thanks again. And I'll catch you next episode.