In our recent article asking whether entrepreneurs should bootstrap or raise business angel funds, we had an interest point made by Bill Morrow of AngelsDen. He suggested that raising funds gives competitive advantage to the company with the money…
This got me thinking – is there a real and tangible benefit to startups simply because they have raised money? If so, what is it and why…
Thinking it through, it seems to come down to leadership.
Well, more specifically, there is leadership of your particular market or space … and leadership in terms of a ‘great management team’.
A startup team which raises funds tends to get more media attention. It tends to become someone of a darling in the industry press and, perhaps because it is rare, its is assumed that this management team ‘know’ what they are doing.
Okay, a management team that doesn’t raise finance may know how to run that business better, but the media doesn’t think like this.
Media likes success stories – and for media, raising funds is success. (Yes, yes, I know, for business angels and entrepreneurs, success = profits and exits, but we are talking about the media here).
But does the media matter?
You bet! The media now includes not only tradition press and TV but also online, independent blogs and the raft of social media environments. The media has really become the marketing channel of nearly all digital or consumer based startups.
Startups that have money are lifted up on a pedestal as successful- and as everyone likes a success story, it largely becomes self-fulfilling.
Of course, to raise funds in the first place, you must present a credible management team – that is, credible in the eyes of business angels or early stage VCs and that means the media is relying on the investors to sift the thousands of startups from the few that get funding.
This ability of a startup to survive the sifting is of huge value – it propels the business into that small group of startups that raise money.
In a similar way, startups that successfully navigate the entry process into startup accelerators have been filtered by a similar set of people who are investing time and (in some cases, small amounts of money) with the aim of seeing a return on their money.
… and makes it harder for ‘me-too’ startups to follow.
Why is this?
Once a new startup has raised money and is executing swiftly, then they then to gain the leadership in that sector.
The value of being a market leader over, say, a third place rival, is that your profits may be double or treble that of your rival. In many markets being 4th or 5th in the market place simply isn’t going to make a profitable business
When doesn’t this apply?
Okay, talk about market leadership and effectively gaining the ear of the media is all well and good – but when does it not apply?
… when your are working in a niche or B2B market that depends on relationships (or direct sales) to build customers rather than consumer based services or similar.
Essentially, if the various media provide most of your marketing channel, then, gaining funding will significantly increase your media footprint and by being able to execute faster, should ensure that you gain the leadership in your space – which delivers a competitive advantage to your business.