The Risks of Raising VC Too Soon
Written by Dave Bailey

Are you considering raising venture capital? Here's some of the risks involved with raising a round of VC money too soon, and how to avoid them.
Iāve managed to raise investment from a PowerPoint presentation twice over the last 10 years. Starting off with money in the bank sounds like a great ideaāāābut it turns out that itās not that simple.
The cost of investment goes beyond equity dilution. Raising capital changes your mindset, often in unhelpful ways. Hereās why Iād never raise outside capital at the idea stage ever again.
Learn new skills every week ->
1. Investor discussions lock down bad assumptions.
As you pitch an early-stage idea, investors probe into your business assumptions. Over time, a consensus naturally forms around the most āinvestableā assumptions. When the investor finally says āyesā, it feels like a form of market validation. As the focus turns to planning, the latest set of bad assumptions are locked down . . . and theyāll come back to haunt you later.
2. Hiring people puts a layer between you and āthe front lineā.
When youāre building an idea, hundreds of tiny decisions need to be made. Raising money allows you to recruit other people to take some of those decisions for you. However, every designer, developer, marketer, and salesperson you hire takes you one step further away from your customers and technology. This creates a communication overhead thatās hard to manageāāāespecially at the idea stage, when the learning curve is steepest.
3. Raising capital is an excuse for not skilling up.
Every successful founding team I know has had to painfully learn the basic skills needed to build their ideas themselves. This includes how to design, develop and sell their idea, and a need to raise money early is often due to a lack of these skills.
Iād always suggest looking for ways to fill the gaps that donāt require funding. For example, look at recruiting, creating partnerships, orāāāmy personal favouriteāāālearning new skills yourself.
Learn new skills every week ->
4. Early money encourages āover-buildingā.
To quote product development guru Marty Cagan, āThe really good teams assume that at least three-quarters of the ideas wonāt perform like we hope.ā The scope of āminimal viable productā tends to increase proportionally with the amount of money available. All too often, funded teams overcomplicate their products just because they can.
5. Investors sound more helpful than they really are.
Donāt get me wrongāāāIām a huge believer in connecting with, and taking advice from, people who understand startups. However, forming a solid board of voluntary advisors can be equally as helpful, without needing to raise any money at all.
6. Investment requires you to āgo all inā.
Raising money might sound like a less risky way to leave your job and focus full-time on your idea. However, given the low chance of success of any new project, itās worth working on it at night, on holidays, or over weekends before putting all your chips on the table.
7. Setting bad legal precedents will hurt you later.
At the idea stage, you have virtually no negotiating power. Yet the first round of funding is where many important terms are agreed, which form the basis of every future round of funding. Agreeing to the wrong terms can prevent you from raising professional investment further down the road.
8. You begin a never-ending addiction.
I constantly meet funded founders who are looking to raise more money, to start selling, marketing or shipping their products. It becomes a constant excuse for putting off the most important things that they should be doing today.
This is the dark side of raising money: it consumes you. The easier it is to raise money at the earliest stage, the more it takes hold of you. Thatās how they get you!
Learn new skills every week ->
So what should you do if you have a business idea?
Maybe youāve read this and thought, āBut my case is different.ā While I canāt slap you out of it, I can offer you some real alternatives to raising money:
- Learn a skill. Over the last 10 years, Iāve taught myself how to write good copy, how to manage products, how to code, how to design, how to write articles, how to recruit people, how to build a following, and anything else Iāve needed to get to the next level. Skills are your leverage at the early stage, not money.
- Simplify your idea. Itās time to get creative. Can you serve customers manually at the beginning? Can you use SMS and email instead of creating an expensive mobile app? When you take the possibility of money off the table, youāll be surprised by how much you can simplify things to get going.
- Focus on āramen-profitabilityā. You need to think small before you can think big. Set your first goal as making just enough money to live on. Maybe this is Ā£2000 a month. Figure out how many customers you need to achieve this and how you can make it happen.
When youāre ready for funding
Funding is appropriate for products that have some traction in a large market.For the 99 percent of companies that donāt fit this bill, external capital can be a recipe for disaster. If youāre at the invention stage, remember that the mother of invention is necessity, not money.
Continue reading about startup funding:
- Looking for funding for your startup? Explore our tried and tested fundraising strategies to get you started.
- Struggling to write a good pitch? Read up on how to write the perfect pitch and turn prospects into paying clients.
- Developing a product? Learn how to come up with exciting and innovative product ideas.
Originally published Mar 7, 2019, last updated Jul 27, 2023
Learn a new skill every week
Subscribe to my weekly newsletter and learn new skills and mental frameworks that make startup life easier.
Unsubscribe any time.