For the author, raising money before knowing if your product and the market are going to connect can be a mistake. First sell, then comes the rest.
We received the call we were waiting for. An angel investor was willing to make us an offer.
After some back and forth, and even though it was a “large” amount of money, we said no. The main reason is that we were still figuring out what we were doing and knew it would be too easy to waste money.
What led us to such an unusual conclusion? Four and a half years ago, my team and I had a sobering experience when raising and spending extravagantly 200,000 euros that led us to understand and verify reality.
I thought money would accelerate our path toward finding our business model, but it only created a distraction and ultimately led us to waste money on things we didn’t even need to think about.
4/5 years ago my startup (Panda Training, which at that time was a search platform for trainers who offered training and companies that needed it) raised 200,000 euros from various funding sources.
We ended up leaving Helsinki for New York that summer after a “killer” first run in local sales in the spring with a product that “it was supposed to be ready by the time we got to NYC”.
It was a bad time to raise money because we didn’t know what we were doing. We didn’t have a product and we had no revenue. However, fast forward to today and we have a product with close to 20,000 euros of monthly income. But despite this, we ended up saying no to an investment. The main reason is that it is still too early and we are not there yet.
After raising 200,000 euros, we ended up hiring people and increasing our staff to 14 people at its peak.
We have community managers, marketing managers, sales managers and all kinds of developers. We spend time designing the job description, marketing it, selecting people and onboarding them. It is a very simple task to do when you are a stable company. But when you don’t know what you’re doing, you have no income, and you change direction every week, it’s a recipe for disaster. Employees are not founders. They need direction and can’t adjust every week. Even for the founders it is super difficult and it takes me, as CEO, several discussions with the team.
People can help you scale what you’re doing well and what’s working. But if you don’t know what you’re doing, it will take you longer to field a team. of 14 people than it would have taken you to do the job alone. Not to mention it’s super expensive.
One term that is possibly the most important for any startup is product/market fit. This is what one of the best investors in the world, Marc Andreessen, says about it:
«Simply put, customers are knocking on your door to get the product; The main objective is to answer the phone and all the emails of people who want to buy. You can always feel when product and market don’t fit. “Customers don’t get the value of the product, word of mouth doesn’t spread, usage doesn’t grow as fast, press reviews are a bit ‘bland’, the sales cycle takes too long and many deals never close.”.
Why is product-market fit important? Because it’s what makes a startup successful. Do you think it is the investment you have achieved? How many people have you hired? The income? The benefits? I would say it is none of those things.
A startup is a company that is looking for a business model. Product/market fit is when you find your business model. Having product/market fit means you have a good chance of surviving the next 10 years as a company, as long as you stay calm. Raising 1 million euros and going bankrupt in 2 years is not a success.
Why do startups make such basic mistakes? Why do they raise money and hire people when they don’t need it? I think it’s about our psychology. Inherently, to build a business you have to be optimistic. I picked up this idea from former Intel CEO and “High Output Management” book, Andrew Grove:
“CEOs always act on leading indicators of good news, but only act on lagging indicators of bad news.” This is because “To build something great, you have to be optimistic, because by definition you are trying to do something that most consider impossible. “Optimists would certainly ignore leading indicators of bad news.”
Being optimistic, businessmen tend to confuse interest with demand.
Interest is when someone says “Amazing idea, we should try it when we have some slack in our organization and the right opportunity arises.”
Demand, on the other hand, is when they say (in a louder voice): «We really need this! Right now! Where can I sign?
The reason I went to conquer New York at age 21 is because I confused politeness and interest with demand.
We thought they were going to buy our service. We were wrong. Our potential clients just liked the kids and their innovative idea, and in some cases they invested in trying it out with them.
Many confuse courtesy with demand and rush to build their product. We were not an exception. We invested thousands of euros in the salaries of developers in Serbia and only 6 months later we realized that no one needed our product.
However, looking back, we didn’t need to build an amazing backend to realize that no one wanted to use what we were trying to build. Even a quick mockup would have done the job. And yes, we definitely didn’t need an iOS developer to adopt our mobile web solution before it was validated.
You don’t need a fancy office. And I would dare say that you should only sell with a Powerpoint. Once they pay, only then can you start building. And ideally it should be a considerable sum. The price of a commitment at the coffee level is not a good indicator to invest 100,000 euros in development.
Another thing I’ve noticed is that investors will come to you if you have a good business. Randomly, somehow they will find you. Not all, but you will start to receive strange offers. We did not receive any offers with Panda Training at first. We also didn’t receive any after pivoting for the first time. But now, after the second pivot, with close to 20,000 euros of monthly income, it has started to happen.
In the case of another company I’m a part of, GrowthClub, the angels came knocking very early. We doubt. However, with GrowthClub we took very little pre-seed money as a buffer and because we wanted to bring in a couple of angel investors as advisors. The difference from a typical case is that we don’t spend 6 months full time looking for investors, the capital we gave up was quite small and we are keeping a close eye on our P&L.
Is your business engine working?
So when should you build?
After selling.
When should you raise money and hire people?
When you have built the engine of your business. When you know your target audience, your marketing channels, your value proposition, your profit margins, and you can say with confidence that if we put 1 million euros into this engine, we will get 2 million euros out.
And as a final comment, these days Panda Training is thriving after 2 pivots and a lot of bootstrapping.
Today, with clients like SAP, Universal Pictures, Stora Enso, we are making coaching 10 times cheaper and using it as a tool for the deployment and implementation of strategy, culture and people development. Our service is a hybrid between human and chatbot that also collects critical data and insights. In short, we were delighted that investors were interested in us. But rejecting the investment was the right decision.
