Startup Metrics: Is Raising Money The Holy Grail of Success?
There was an interesting discussion on the web recently regarding how much emphasis (or hype) we see around the funding amount received by various startups, and frustration over how it has become an indicator of perceived success instead of actual revenue, active customers, IPOs, etc.
In Shoehorning Startups Into The VC Model, Chris Dixon thinks most startups can/should go without VC assistance, and that doing so will help keep focus on building a successful business in lieu of investing your time in only raising money:
Tech startups go in an out of fashion. When they’re in fashion, as they are now, entrepreneurs and VCs get lots of attention. Most of this attention focuses on things that involve money, like financings and acquisitions. For some entrepreneurs, raising venture capital becomes a goal unto itself, instead of what it should be: a heavy burden that only makes sense in certain cases.
The best source of capital is customers.
Francisco Dao adds:
…it occurred to me that much of Silicon Valley actually does treat raising money as an indication of success. Furthermore, the ramifications of this perception have created an ecosystem that often values hype over substance.
…we have inadvertently created a system that provides greater incentives for being “credit-worthy” rather than “business worthy.” Not only is this misguided, but it is also a much easier criteria to manipulate.
Using the amount of capital raised as the primary measurement of incubator success only magnifies the problem. Instead of focusing on building viable companies, an incubator is much better off acting as a startup’s agent for raising money.
Over the last year the focus from the press and the startup community itself has been on ‘how much’ money have you raised, with what your technology does coming second. This seems backwards to me, especially as I know a lot of companies that have raised a lot of money and gone nowhere with their product. In fact, that number is fairly large.
A perfect case and point that is still referenced today is Color. For weeks, the $41 million they raised pre-launch was at the tip of everyone’s tongue. Something incredible was coming. When the app was available, everyone I knew installed it. It didn’t meet the press hype. And most uninstalled the app immediately after.
The fact that all anyone in the Valley has to say is ‘Color’, and we all know what that means, says something. It says there is way too much emphasis placed on getting funded when it should be about building a product that people want/need.
I think we all know that should be reversed.
And while the press hype around funding seems to have escalated over the last 12 months, it and the people doing the investing have been getting headlines for some time now as Om Malik references in this post from 2010:
My then-editor David Churbuck would call me into his office, sit me down and tell me that investors are a good way to judge if a company is worthy of a story. He would tell me that investment dollars and investors help you define a story, but they are never the story.
The more I paid attention to that advice, the better I became at choosing startups to write about. The technology was always the primary criteria…
Exactly. Let’s get back to focusing on the tech. Why we do what we do. What we hope comes from it. Who should use it. Why it is different than anything else. Why it’s simply great. Following that prescription, some startups won’t need to raise a VC round since they can offer something that will instantly bring paying customers. Others however, will need some ramp room, and that’s fine.
All I ask is that the hype about money raised should be second, if at all. Unless of course, we see another ‘Color’. I mean, we almost have to talk about that, right?
All kidding aside, what do you think? Is the amount of money raised a fair judgement of a startups success or merely something to pad someone’s ego? Does it really matter or is developing a product/service that has mass appeal or drives millions in revenue a better standard to track startups by?