The Best Investor is Your Customer
Get out of the fund-raising bubble and double-down on winning contracts
There are over 4 million results when you search “Airbnb pitch deck” on Google. In fact, multiple websites host investor decks of companies that made it big. It seems we startup folk are obsessed with uncovering the secrets to pulling dollars from Venture Capitalists’ hands.
On the other hand, it’s really hard to find the pitch decks that Microsoft, Salesforce, LinkedIn, or Google used to land their first customers. In my experience, raising $1 million from investors is ten times easier than getting your first $1 million in revenue. So why the obsession with fund-raising?
Today, with startup funding and exits at low points, the timing is right to re-think how you get your company off the ground. And if you still believe the world revolves around investors, perhaps my story of seeing one of the industry's excesses from the inside will convince you to swing the pendulum toward funding your company through customer orders…
“I’ve realized that it’s all arbitrage.”
It’s Summer 2021, and I’m at a dinner with a mixed group of startup founders and VC partners. We’re excited to be out talking shop again after a year-plus of being trapped inside during COVID. The pent-up demand for human contact, plus the generous flow of wine, has us knocking the rust off our conversation skills.
And there’s SO MUCH to talk about in the startup space! Record investment dollars are coming in, valuations are sky-high, and it feels like The Roaring ‘20s (2.0) are here to stay.
One of the more talkative investors takes the table’s attention as he begins to describe the SPAC that his company just launched. We’ve all been watching the sudden rise of SPACs—Special Purpose Acquisition Corporations. It’s a “blank check” company that goes public and then later makes an acquisition. The concept had been around for decades but suddenly came into vogue as a way to bring smaller companies public faster than before. And in this record-breaking market, fast timing is everything, baby.
This investor is new to the SPAC process, and as we refill his glass, he’s having a grand time educating us startup puppies on the process. At one point, he says:
“I’ve realized that it’s all arbitrage…We’re just taking an asset and putting it into the open market, where the buzz creates an inflated price. Our firm would never invest at this price, but if other investors will, why not take advantage?”
He went on to share how he was driving one of his portfolio companies down the SPAC path—pushing them to acquire smaller companies that would make their numbers bigger. Never mind taking the time to build integration or synergy—the market is hot now!
As I listen to the investor rave about timing the market and watch his glee in describing this game, I notice that despite the wonderful meal, I’ve lost my appetite.
I had grown and sold two companies at times when the market for them was strong, but we never thought about finding a sucker who was willing to pay more than what the business was really worth. We built businesses that vastly exceeded revenue and profit projections going into our acquisitions—and both companies are still alive and producing profits today.
On the other hand, look at the ruin left by the pop of the SPAC bubble that this and many other investors were so keen on. SPAC returns were -59% and -67% in 2022 and 2021, respectively. Deal makers with good timing made a killing, but reality has set in for the “arbitraged” investors. Layoffs are rampant. The SEC is finally cracking down. The party is over. A few people got really richer. Most are left wondering what the heck happened.
When you raise money from professional investors, you must realize their objectives are not perfectly aligned with yours. They are looking for home runs, while you might be happy with a base hit. They may want you to build more software because that’s what the market likes—even if your customer has no interest in putting their hands on keyboards. And they may insist that you hire quicker to hit 120% growth instead of a paltry 90%.
And the more money you take and burn, the more decision-making authority you give away. You might become a pawn in whatever game they want to play.
It’s not evil. It’s the way this world works. Now you know, so invest more of your time with customers—and get them to invest in your company by paying for your products and services.
Customers are the Best Investors
Chasing investor dollars takes precious time away from thinking about your customers and product at the formative stages of your business. When on the pitch trail—which never seems to end, even after finishing a round—you spend so much time selling them on your idea that you begin to think it is perfect. But no startup idea is perfect. Every successful startup changes and pivots as they go based on customer feedback.
And there’s just no other way to say it but this: VC money fucks with your head. Everyone congratulates you, the media does stories, you get invited to portfolio events, and every vendor on the planet fills your inbox. Startup-building is a continuous struggle, and raising a round feels like you’ve reached the finish line. These smart investors believe in you, so you must have a winner on your hands, right? Never mind that we missed our number and more customers didn’t renew. Thanks to the funding, there’s plenty of runway—until it’s too late.
But when customers invest, life is sweet.
They invest their precious time to hear your pitch. They invest social capital within their walls to champion your company and push through their many co-workers who are biased to block, delay, and question trying something new. They invest personal capital in taking on the risk that your barely viable product won’t be a waste of money.
If and when they pay for your solution, you receive both cash and market validation that you’ve built something of value.
Then you’ll start to get calls from investors who are eager to back a sure thing. And you can negotiate better terms or keep customer-funding your growth and building the way you believe is best.
I hope you choose to build a company that lasts.
Bob Gilbreath is a 2x-exit entrepreneur and co-founder of Hearty, a curated matchmaking service that combines top software developers with early-stage, venture-backed startups.