Should Xpanse Data Raise Money?

2023 is coming to a close and my Sloan graduation next May is right around the corner. Consequently, I can no longer comfortably defer the question of whether I should try to raise outside capital for Xpanse Data. This question has 2 components:

1. Should I raise any outside money or bootstrap?
2. If I do seek to raise money, what types of investors should I target?

Before diving into these questions, it is important to note that I am currently a solo-founder (although am trying to change that). As a bootstrapped solopreneur, I think I could acquire 1 or 2 paid pilot customers after 6-12 months of full-time work. With a team of 2-3 full-time people, I think we could shrink that timeline to 3-6 months (with a higher quality MVP). From a Capex perspective, the MVP requires a couple of 3rd party data sets as well as server costs, neither of which are prohibitively expensive.

Pros/Cons of Fundraising

Pros

• I maintain more of my personal savings and can pay myself a salary
• I can potentially pay 1 – 2 other full-time teammates, plus 1-2 contractors
• Outside investors can provide value when it comes to:
  • Hiring
  • Customer Intros
  • Advice
  • Pressure/Accountability
  • Additional fundraising
• With the right investor set, the probability of success should increase
• A successful fundraise sends a positive signal to potential teammates, customers, and investors

Cons

• I give up meaningful equity by raising money at what should be the smallest valuation of the company’s life
• Depending on the investor composition, I may be pressured to make decisions that favor growth over company durability
• Depending on the investor composition, the company may fall onto the fundraising treadmill – raise money, rush to hit a milestone while hemorrhaging money, force yourself to raise again or die
• Fundraising takes time. Time is valuable and it should be spent building something people will pay for

My current philosophy is that I plan to do this entrepreneurship thing for a long time, and that 1st time founders are the least likely to succeed from both a probability and outcome magnitude perspective. Time is my most valuable asset. Consequently I should take actions that accelerate Xpanse towards its ultimate outcome, even if that outcome realizes as shutting Xpanse down.

I think it makes sense to try and raise external capital. If I assume that fundraising is the correct decision, what types of investors should I target?

Potential investors include:

• Friends/Family
  • For argument’s sake, let’s assume this group provides no strategic value
  • I would want to raise capital from this group for 2 reasons:
    • I imagine that losing money for people that I care about is a miserable feeling
    • If Xpanse does succeed, I imagine creating wealth for people that I care about is a fantastic feeling
• Advisors
  • Building a team goes beyond employees, and I’m fortunate to have met people who have deep experience with analytics startups as well as selling software to financial service companies. My assumption is that advisors will be even more helpful if they have a financial stake in the company.
• Strategic angels
  • Similar logic to advisors
• Customers
  • If I could get a couple of early adopters to take a financial stake in the company, I assume that they would be even more eager to engage with the product and introduce it to colleagues.
• Strategic acquirers
  • If Xpanse succeeds, the most likely outcome would be an acquisition by a strategic acquirer (Bloomberg, S&P) or a fund (Point72, Tower Research)
  • These companies have venture funds, so maybe it makes sense to try and raise from them in order to build an early relationship?
• Accelerators
  • Accelerators offer an aggressive tradeoff. The accelerator takes equity in the startup at an extremely low valuation in return for expected value creation (mentorship and access to the accelerator network).
    • Example: YC invests $125k for 7% of the company at a ~$1.8M valuation. That valuation is 2-5x lower than what Xpanse would get from any other investor.
    • I think accelerators can make a lot of sense if the startup sells to a customer base that the accelerator knows well, or the startup operates in a highly regulated and complex industry.
• Early stage startup programs (Grants and Uncapped SAFEs)
  • Examples:
    • MIT’s Delta V Accelerator: $20k of dilution free capital
    • NFX FAST Program: MIT students apply for an uncapped SAFE between $100 – 250k
  • These are the best terms a startup could ever get from an investor
• Traditional VCs
  • The right VC can be immensely helpful with teambuilding, customer intros, and GTM
  • Most VCs only invest in companies that they think have the potential to become a unicorn. Given VC fund economics, VCs are incentivized to push their companies towards binary outcomes – i.e. go big or go home

I think that Xpanse has a great opportunity, but I am skeptical about its potential to become a venture-scale company. Based on this post, I am leaning towards:

• Pursuing external capital
• Avoiding traditional VCs and accelerators

These are my initial thoughts, and all feedback is welcomed!

-Noah