WOWZA! Montreal hasn’t seen this type of funding news since…forever?!?
I’ve said it before, it’s an exciting time to be a startup in Montreal and all this activity is great for many reasons:
- Jobs are being created;
- Investors south of the boarder are investing up here;
- Montreal is making a name for itself;
- The community is proving it’s possible to build a tech startup in Montreal.
People are working their asses off to make this all happen and we should be really happy about it. Good stuff all around!
I don’t want to be a downer. I don’t want to be negative, but I’m concerned and I have been for a while. Not about Montreal. Not about the Canadian ecosystem.
I’m concerned about the motivations of entrepreneurs around the world. I’m concerned about the reasons people are starting companies.
Let’s face it, being an entrepreneur in 2015 is cool, which I guess is fine, but with the recent coolness of entrepreneuring, its paradigms are becoming blurred. When you look around startup communities around the globe you’d think launching a business is about raising capital. You’d think the more you raise, the better you are and the more successful you are.
Well guess what? That’s not what being an entrepreneur is about.
As a founder of a startup, the objective of your comapny is to create value for individuals or businesses. That’s it. If that’s not your goal you’re not doing the right thing and you’re certainly not doing it for the right reasons.
If you need capital to accelerate the path to creating value, then go for it. By all means raise money.
But please, all entrepreneurs out there: stop thinking or acting like raising capital is your end goal. Things just get started when you raise capital. Over night you’re accountable to a group of individuals and the end game of your company has dramatically changed.
Investors lend you money to make money. They don’t invest in you to help you live your dream. They invest X and they expect multiples of X in return. And this is especially true in Venture Capital.
VC funds are investment vehicles to make money. VCs raise capital from investors (just like you do) and invest this money into companies with the objective to generate a good return. All that is fine, but history has shown that 80 percent of the investments a firm makes will fail, ultimately being a total wash. The other 20 percent of their investments will be successful, but they need to generate enough return to make up for all the capital lost in the first 80 percent. On top of that they need to make a profit.
A fund with $100 million starts with the understanding that $80 million will be invested in startups that will fail. The other $20 million needs to account for the $80 million lost and provide additional gain to make the fund a viable investment vehicle, and that’s why we often hear that VCs aim for a 10x multiple on their investments.
(If you don’t know how the VC industry works, read that paragraph again.)
Why does this matter to you? It matters because it means the money you raise has a big impact on your company’s path and outcome. It matters because of the expectation investors have when they write you a check. Specifically, the expectation from your investors is much different when you’ve raised $2 million than when you’ve raised $10 million or $100 million. Of course, the valuation of your round has an impact too, but the size of the round matters a lot. If you raise a lot of money (let’s say over $20 million) it means you’re swinging for the fences. It means your exit strategy is very different.
As a startup, your default status is failure. Exits are hard and they’re rare, and that’s why you need to understand what’s expected of you when you raise money. Exits aren’t likely at all, but it’s much “easier” to exit a company for $20 million than it is at $110 million or $1.1 billion.
As much as these three impressive rounds of financing are great news for Montreal in many perspectives, I think it’s important for the community to understand what it means for these companies. These rounds are putting these startups on a direct patch for HUGE exits, which is much harder to achieve than smaller outcomes. Of course, we all hope they’ll be successful!
In summary, I’m not saying don’t raise capital. You can choose to bootstrap, raise just a bit of money or raise a lot of money. There’s no wrong or right path, but no mater what path you take, please, please, please, know what you’re signing up for.
I’ll end with the words of Austin Hill, one of Canada’s famous entrepreneurs and Co-Founder of Blockstream, which raised an incredible $21 million seed round:
“Congratulating an entrepreneur for raising capital is like congratulating a chef for doing their groceries. Raising capital is not what defines you as an entrepreneur, it’s what you do with the capital that matters.”
So collectively, let’s stop glorifying fundraising and focus on the right thing: creating great businesses that drive value!
Here’s to Breather, Lightspeed, AppDirect and Blockstream and their path to success!