Disclaimer: I’ve never raised VC money before.

Back when I was just playing around with the idea for my startup, I decided to put together a quick executive summary and apply to the UC Berkeley Business Plan competition. And we got rejected from round one not only because our ideas were terrible, but one of the judges commented “you’re only looking to raise 30k?”

Yes. Only $30k. I actually felt a little insulted that the tiny amount we wanted was a critique of my executive summary. For the stage we were at (two weekends before my co-founder Andy and I built a prototype), $30k was far more than we needed to get something running. Fast forward two months, and we won a $35k grant after building a prototype for $0. Who needs to enter a business plan competition anyway! (I now advise the business plan competition)

Throughout the summer, we were burning through cash. Not going to college meant paying for our food and rent, so the $35k grant wouldn’t last long. We started talking to angel investors, and ultimately met this guy named Steve Blank. He’s best known for his writings on customer development, and wrote “The Four Steps to the Epiphany” – a book that I’d recommend to anyone and everyone who aspires to create a meaningful business. I told him about the problem we had raising money while still in school, and without that mystical hockey stick curve. He basically told me to not to raise money until I saw a hockey stick curve. “… but Steve, if we had a hockey stick curve, we probably wouldn’t have trouble raising money!” And that was the key lesson: To be in a position where we would never have to raise money.

He essentially told us what every angel investor who said “no” told us: go back to the drawing board, get more traction. But instead of just saying that we should do all of the above, he told me why: If we were to raise money now, we’d burn through it no matter what. The important thing is to spend that money wisely, and without a scalable sales model, we’d be spending money on the wrong things. We’d be scaling an ineffective sales and marketing strategy, we’d be prematurely growing out the engineering team, and we’d basically be burning through money as ineffectively as Paris Hilton. It wasn’t what I wanted to hear, but after thinking about it more, I realized that he was right.

Just this week, I was talking to some well-known venture capitalists about my company, told them about the idea, talked about the market, and one of the first questions they asked was “do you have a website yet?” Well… not only do we have a website up, but we have a product AND paying customers! And they were stunned because the majority of entrepreneurs who pitch them have nothing to show for but a nice powerpoint presentation. Not to mention, these “entrepreneurs” actually work full-time on their companies unlike Andy and I. And this got me thinking even more about the state of VC… people look at investment money as a means to an end, whereas people like Steve Blank see it as an accelerator for growing something that already functions.

Remember back in your college days, when you flunked a test and thought “that test was stupid! I studied so hard, but I studied the wrong things!” Well, same thing applies to raising VC money too soon. You don’t have the kinks to your product settled, you don’t understand your market well enough to be marketing to them efficiently enough, and raising money buys you the time you want to scale an ineffective operation. So why bother?

Now the worst situation would be if you’re a “hot” startup that’s raised a few million dollars, you have no revenue, no hockey stick curve, and you’re trying to raise more money now that your first round is almost dried up. Not even Steve Blank could tell you to give your first VCs their money back and to get things right, because it’s too late. You just wasted $X million dollars building a scrappy product, you don’t have any revenue, so you’re practically at the mercy of your next VCs. Crappier valuation, more dilution for the team. Last time I checked, the vast majority of web startups do this.

So this is the second thing I’ve learned from my summer of entrepreneurship: plan that every round of financing is your last. With only $50k from grants, we’ll be fine. This means 100% ramen profitable for a 5 person team, and we’ll never have to raise VC money if we don’t want to, or if VCs don’t like us. And this is psychologically very good for us, because we know we won’t be any rush to appease the VC world, and because we can focus all of our time on the product. There’s nothing worse than spending time to raise money, because it effectively shuts down your company for the weeks (or months) that you go through the process. So I figured, if we’re ramen profitable, wouldn’t any smart investor want to come to us? And instead of it taking a few months to pitch a whole string of investors, we could focus on building a great business over the course of our senior year in college, then upon graduation it shouldn’t be too difficult to raise money. Yet again, we won’t need VC money since we’re already profitable… see how powerful this mental exercise is?

Being still a senior in college, I might just be overly idealistic. Everything I write is how I think the world should work rather than how things actually function. But I think there’s a lot to be said about Paul Graham’s view of college-aged entrepreneurs:

“Someone ignorant but smart will come along and reinvent everything, and in the process simply fail to reproduce certain existing ideas”

My translation of this is to trust your ignorant instincts, and do what seems to be ideal because many people don’t understand why they do things in the way that they do. This directly relates to the argument of why it’s not good to copy the work of others: because you don’t understand how and why people did things in the way they did. How do you know that they aren’t copying the work of someone else too? By looking at things from a fresh and original perspective, you have a complete grasp over your decision making power, and you significantly decrease your risk of making stupid and uninformed decisions.

I think of raising money in the same way that I think about getting married. It’s something I naturally feel inclined to do (since it’s something everyone seems to be doing these days), but I want to be honest with myself: why in the world would I want to get raise money (or get married) other than to be part of the norm? At the time of my writing this, I don’t have very good answers to either questions. My business isn’t operating at the level of efficiency needed to make good use of VC money, and I’m in no mood to give up my career for bearing children.

Until I can directly and honestly answer the questions to my own life pursuits, I won’t be raising money or getting married. But who knows, my views are likely to change over the next few months. :)