tl;dr: For Founders, the decision to raise capital should not be a foregone conclusion. A simple game based can help highlight the benefits and drawbacks that underlie that choice.  

One of the most common questions faced by founders is if they should raise capital. That decision may seem simple on its face, especially when staring down the day-to-day challenges of running a company on your own. It’s easy to see raising capital as a panacea for growth and short-term stability. However, there are trade-offs just below the surface, many of which manifest themselves in the medium-term. To their credit, many institutional investors are candid about this dynamic and encourage founders to weigh the benefits of venture capital against its potential downsides. In an effort to shed light on an overlooked aspect of raising capital, and hopefully help others determine their best path forward, we decided to do what SimCase does best – make a game to highlight these takeaways. As part of our nascent, free-sample initiative you will be able to play two sample games that allow you to learn-by-doing right here within this article.

All Aboard the Funding Train!

One of the first times I truly understood the complex nature of raising institutional capital was at a talk by First Round Capital’s Josh Kopelman in Philadelphia. One of the issues he touched on was the decision to bootstrap or take institutional capital. In a metaphor that we have brought to life below, he paralleled the funding choice with catching the train to New York City. Founders who choose to raise capital opt to take the Acela or express train, which promises a premier experience that should be faster since it makes fewer stops along the way. Alternatively, his metaphor casts founders who bootstrap as having opted to take the venerable Northeast Regional with its various stops along the way. Since starting a venture is a journey defined by risk, all trains to NYC break down frequently and leave you stranded along the way. While the obvious choice may be to take the express train, the local train does offer one clear benefit – users can exit the train at any of the stops along the line. This offers an alternative to getting stranded, and while Princeton may not be as attractive as New York IPO, it is likely better than having to walk back to civilization. This dynamic highlights one of overlooked aspects of raising capital – your investors are singularly focused on a large exit (reaching NYC), taking alternative destinations off the table. So which train would you choose? 

How far did you get? 

Did you make it all the way to NYC? It’s a tough road, and not many ventures have the opportunity to IPO. If you took the express train, and the institutional investment it represents, your early progress was accelerated. You can access relevant networks, benefit from sage advice, and tap into a pool of capital that should grow as your company does. However, in exchange for those benefits you often trade the freedom to select your exit. It’s not personal, or even fund-specific, but rather it’s driven by the mathematics demanded by an investor’s returns. Once you get onboard, it’s often all or nothing, and we hope you got that sense through this game.

Alternatively, perhaps you elected to take the local train and get off along the way? Taking an early-exit represents accepting a strategic acquisition, which essentially trades IPO upside for less medium to long term risk. Yet, forgoing institutional capital is often similar to accepting greater short-term risk since you will likely remain concerned about working capital, growth-investment trade-offs, and you may have to hustle harder for the same introductions and advice. Plus, while revenue-funding is both validating and equity-free, it can be lumpy in the early stage of a business. Yet if you do make it all the way to NYC, your share of the pot at the end of the rainbow is likely to be much bigger. The choice depends on each Founder’s context, and we hope this simple train game drives home that point.

Now, Lose the metaphor

This train metaphor is a helpful tool to make these concepts easier to understand. However, founders and entrepreneurship students are likely eager to engage with the decisions set in their actual context. For this use case, we have developed another free demo game as well:

Summary

The goal of this game is to highlight how institutional investment has BOTH benefits and drawbacks. Approaching this decision with the benefit of some simulated experiences will hopefully make that decision a more informed one. While founders are often motivated by the potential of moonshot returns, the reality is that growing into a unicorn is rare. Understanding your industry, your team, and your ambitions is a critical step before deciding if “NYC or Bust” is right for you.

Regardless of the path ultimately selected, we hope that this learning journey has been both illuminating and fun. The speed versus stops(s) dynamic is illustrative of the underlying trade-offs that drive the institutional capital decision, and by playing this train game we hope entrepreneurs benefit from the additional perspective. Instead of lamenting what they wish-they-would-have-known, founders can reflect on what they were glad-to-have-learned before taking on capital. This is precisely the takeaway Kopelman hoped to highlight when he shared his metaphor, and we hope these games help bring that message to life.