Should You Raise Capital If Your Competition Does?

There are a lot of good reasons for companies to raise growth capital from venture partners like OpenView such as:

  • Funding the initial development of the product
  • Attracting and building an experienced Management Team
  • Building and executing Marketing programs
  • Expanding a Sales force
  • Adding operational experience to your company through the board and VC team
  • International expansion outside your current geographic presence
  • Credibility in the marketplace
  • Adding to the development team
  • Operational capital for the balance sheet

And then there is “my competition just raised capital so I need to raise capital too”. While that may be a valid reason, it normally is not. At OpenView Partners we focus on investing in expansion stage software companies that are at least 2mm in annual revenues and or bookings up to 20mm in annual revenues and or bookings that are growing in excess of 100% a year or 30% a year depending on their size and stage.

While it may sound unusual for a venture capital partner to tell a founder and/or CEO and their management team they should not raise growth capital we do it all the time. We recommend that companies not raise venture capital or as little capital as possible until:

  • You have your product or service built and in production
  • You have your market segment identified
  • You have an understanding of the buyer’s persona and the user’s persona
  • You have made repeated sales to multiple clients in you target market segment
  • You have made additional sales to existing clients or they have renewed their contracts
  • You have an understanding of your distribution model and CAC
  • Your growth rate is in line or above your segments growth rate considering your size, stage and market

If you don’t have some or all of the above validation points then raising capital does not mean it will help you build a winning company regardless of your competition. Having the above data is like turning the lights on in the room. It is about building a repeatable model and it will allow you to efficiently leverage the capital to build a great company and leave your competition in the dust.

In previous blogs you have heard me state that it is not about the money… it is what you do with the money that matters. The real winners in the market are companies that are better at operational execution than their competitors, not the companies that raise the most capital. There is no first place or gold medal for raising the most capital. Without some or all of the above data points you will not be able to execute with any capital efficiency. That means you will waste the capital, your equity and your time.

At OpenView we have several portfolio companies that have raised 5-10mm in growth capital with competitors that have raised 20-50mm in growth capital. These portfolio companies are doing as well or better than their competitors.

Which founders, CEOs and management teams do you think have more equity, less dilution and higher odds of achieving a great exit?

Source: George Roberts – OpenView Partners