We read a quote recently from a founder following a funding round which said: “Always raise money before you think you need it”. While we understand the sentiment, it’s worth pausing for a moment and questioning this strategy.
The first principle with any business is that natural movement is to be operating at profit. That is, one should only hire an extra person or incur an extra cost if you can bring in more revenue than the cost it takes to employ the resource.
There are, of course, cases where it makes good strategic sense to incur a cost that doesn’t lead to more revenue. But this should be a temporary state. And it should be incurred or, the state maintained, with deliberate decisioning.
Venture backed businesses incur large upfront costs in the hope that their hyper growth will rapidly offset the initial costs. It’s a time-value equation.
The problem we have with the ‘always raise earlier’ statement is that it normalises the state of needing funding for a businesses to operate. Businesses should be profitable or in a temporary state towards profitability. In which case, raising should be done late and reluctantly, or until there’s a clear reason otherwise.