For The Better - Email 6/27

For the Better comes to you bi-weekly with ideas about how and why to build companies focused on human flourishing and stories of the people who are doing it. Other enthusiasms may occasionally appear.

To Raise or Not to Raise? That Isn't the QuestionOne of the most common confusions about Lean Startup is whether or not the method recommends – or even includes – raising money. This question is a category error. The only real financial guidance Lean Startup offers is that using resources well is always a good plan. The whole basis of the build-measure-learn process is that it’s a tool for making small, considered investments as you go in order to collect real information about what you’re building before you use up your entire runway on something that has no future. The reality is that raising money may or may not be a good move. It depends on where a startup is in its journey and any number of other factors, including where that money is coming from. The only certainty is that when a company does raise money, it will amplify whatever is already happening – good, bad, and pretty much everything in between. Funding chaos or uncertainty will lead to a very different outcome than funding a company that has done the work of experimentation to determine the true value of its product. And even funding something solid will eventually hit a period of diminishing returns. This X thread by Eric Paley breaks these phenomena down into all their component parts in incredible detail and offers really good advice in the form of two “Laws of Startup Physics”. As he writes: “Failure to respect the rules of startup physics - capital compounds good and bad, and all positive compounding eventually diminishes - has been the cause of just about every startup failure I’ve seen that can’t, simplistically, be written off as “no one wanted the product.””He also gets into the hazards of entering a partnership with funders whose goals and values aren’t aligned with the company’s. “Most VCs want growth so badly that they’ve come to demand it regardless of the cost. This obsession is a short-term optimization with huge long-term implications for the startup, its founders, employees, and, ultimately, investors.” (His “cautionary case study” is a good read as well). In other words, raising money can be destructive to your company if it's supporting the wrong things. For example, the scenario in which a founder believes: "We're losing money on every sale but we're going to make it up in volume." More funding won’t necessarily, or even usually, change the economics of your business. Only knowing your business can do that. To put it more bluntly: if you don't know what's going on in your company, you shouldn't raise money.Eric