Every now and then, my LinkedIn feed shows posts like these:
We have raised x million kroner. We are expanding our team. We are hiring for y new roles. Help us spread the word.
It is good news. Of course it is.
But what happens next matters more than we often acknowledge.
Raising capital does not mean the company is on the right path.
CB Insights analysed 431 venture-backed companies in the US that shut down after 2023. Together, they had raised $17.5 billion in equity. The most common reason founders cited for failure was poor product-market fit. 43% said they had built something the market did not want enough.
The median company had raised around $11 million. The problem was not simply access to capital. Capital had been committed before some fundamental assumptions had been resolved.
In fact, the period after funding can be when some of the most consequential commitments are made.
I recently spoke to a British investor who told me:
“Most founders are really bad at validating their commitment plan for the capital. And most investors are bad at asking and probing into it.”
I think this is partly a habit inherited from decades of cheap capital.
A startup raises money on a story:
This is the problem we solve. Our addressable market is this big. This is the traction we already have. See how strong our team is. This is what we need to do next, and we need this much money for that.
The story is convincing enough for investors to invest.
Then the round closes.
The champagne pops. The announcement goes out. Photos are taken. The media writes about the round. Everyone celebrates.
And somewhere in that transition, something changes.
The investor who was sceptical during the fundraising process now has a stake in believing the story.
The founder starts executing it.
I did this myself.
After our seed round in 2021, I was told to stop being careful with the money and use it to grow and take market share. I overrode my own instinct because the people saying it had invested in other companies before, and I had not.
At the time, it felt like the responsible thing to do. We had raised the money. Now we needed to use it.
Looking back, I can see how quickly an assumption can become a commitment.
When I talk about committing based on untested assumptions, I often get blank looks.
It sounds abstract.
But assumptions are rarely abstract to the people making them.
They are beliefs that have become so familiar that we stop seeing them as beliefs.
We believe that to sell more, we need more salespeople.
We believe that if we build the product well enough, customers will use it.
We believe that this feature will unlock the next market.
We believe that we have traction and simply need more capacity.
Maybe these things are true, but have we proved them?
This is the question I think should be asked much more often after a funding round:
What have you proved, and what are you still assuming?
And then:
How will you use the capital to get those proofs in place before you commit?
Because this is the cheapest moment to find out.
‘Before you hire.
Before you build.
Before you commit millions to a plan.
Proving before committing does not slow you down.
It allows you to move fast with confidence.
A few weeks spent testing what you believe costs you a few weeks.
Six months and millions spent before testing can cost you the company.
My book is called The Avoidable Startup Failure. It is out now.
In Norway, the signed edition is at anjali.no/book. Everywhere else, it is on Amazon in hardcover, paperback and Kindle.