How to Decide Whether to Raise Money or Not

I hadn’t thought about it much until then.

In fact I’d intentionally not thought about it, and didn’t want to until I had to.

My last company needed venture funding to get off the ground, but this time that hasn’t been the case.

But the sudden interest forced me consider it.

Here’s how I thought through the decision, and where I landed:

How to Decide Whether to Raise Money

The 3 Ways to Build

When you become a founder you can choose to build one of three ways.

Establishing these is important since it will impact if, when, and how you decide to raise money.

1. Traditional Business → This can be an agency or a restaurant. It’s a business that will never reach venture scale. More importantly for our definition, it isn’t intended to and has no aspirations to. It typically requires profitability much sooner and is intended to generate cashflow.

2. Silicon Valley Small Business (SVSB) → As brilliantly outlined by Anu Atluru last year, this is an emerging middle-ground where scalable businesses are built with “small business values but Silicon Valley ambition.” You can loosely equate this with the bootstrapping movement, though some investors like Josh Payne are funding these companies. There’s not really a good name for it today.

3. When to Decide

There are two schools of thought for when a founder should make the decision about whether to raise money or not (regardless of when the fundraise actually happens):

1. As early as possible

2. As late as possible

Both have pros and cons.

Deciding to raise as early as possible means you have more time to make decisions with the mindset of pursuing raising money. For example, you’d be more comfortable not fixing every bug and just focusing on achieving big milestones (which will help you hit those milestones faster).

Deciding you’re going to raise money (or build a “startup”) right away also puts pressure on you to find a venture scale idea. This might mean you say no to a lot of good business ideas along the way.

As a result, your first step should be understanding why you want to build a startup and then your modus operandi should be to move as fast as possible to uncover a venture scale opportunity.

On the other hand, deciding as late as possible gives you flexibility to arrive at the right idea with full confidence and on your own terms and timeline. The lack of that pressure lets you be more intentional about when you decide to go all in on something.

You also will tend to have more leverage in investor conversations, since you’ll be building a sustainable business that can support itself and grow with or without investor money (even if that growth is slower).

The risk is that actual venture scale opportunities are very rare, and a lot of very smart people are always looking for them (founders and investors).

By deciding later, you risk leaving the market open for competitors or missing the chance to capture it altogether. There’s an argument to be made that if you consider it a possibility, you should just go for it right away.

You can define “as late as possible” as when things start to break without taking on more capital. Some examples:

• You can’t build the product fast enough to satisfy your users

• You have more demand than you can keep up with on the sales side

• Competitors are entering the space (especially if they’re well capitalized)

• Talented people want to work for you but need clarity on their potential equity’s value

…or if people just start offering you money. Then you need to decide.

With Megaphone, I wanted to decide as late as possible.

How to Decide

Whether it’s as early or as late as possible, how should you actually make the decision to raise or not?

Raising will take up a lot of your time that could be spent on customers and product development, but is obviously very high leverage if/when it works out and your bank account gets a big check delivered to it.

I used this 3-step framework for my recent decision:

1. Can I reach my goals for the business without raising? Specifically, can I generate cashflow at a fast enough rate and good enough margins to build the product and grow without diluting ownership? This is easier than ever due to AI tools. You can do less with more. Additionally, agency businesses (like my new ghostwriting agency, Megaphone Studios) can be run with less opex than in the past. If you have a good way to acquire customers for it, you may not need to raise.

2. If you can’t reach your goals without raising, then the question becomes will raising actually your problems? You need to be honest with yourself here. If your problem is a really high churn rate, or the market not responding to your offer even after getting exposed to it, then money will not solve your problem.

3. If raising actually will solve your problems, then the last question to ask yourself is do you open up considerable risk if you don’t raise? For example, do investors go off and fund a competitor? Do already funded competitors catch up and surpass you?

You want to raise from a position of strength. You want the opportunity to be attractive and low risk, not entirely speculative.

Being able to reach your goals regardless of raising, not having any major problems with the business, and not being in a risky position gives you incredible leverage to build the business how you want to.

Ironically, that’s the best time to raise.

What I Decided

I decided to continue bootstrapping Megaphone as a SVSB for now.

The interest was flattering but my unique distribution advantage and the ability to generate enough cash to sustain growth via our ghostwriting arm, Megaphone Studios meant that the cash was less valuable in the short term.

I’m not ruling out ever raising for Megaphone, it just might not need to happen until we’re at a few million in ARR.

By that time, continuing to scale the ghostwriting agency will become an operational headache relative to the opportunity to invest more in growth of the software business.

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