The WSJ reports today on a $41M capital raise for Color Labs, a mobile/social startup pre-launch.  It's a Valley deal with proven entrepreneurs and blue chip investors.  The notion that demonstrated "traction" is a prerequisite for a high-value capital raise is out the window with this deal.  

We see stories like this and get the impression that it's just raining money in California for Consumer Internet startups.  But we don't get the full story on each deal and have no way of knowing how much effort went into this raise.  I doubt that firms like Sequoia in this case handed out $41M strictly on a napkin.  The founders must surely have put enormous energy into their product design and business strategy, and you can bet there were lots of fits and starts along the way.  There was also likely plenty of time spent on the fundraising process itself.  Even if the deal was so hot that it resulted in a bidding war, you have to think this was the founders' total focus for some period of time.  And, all this had to be accomplished in an environment of so many other Valley startups that any competitive grid probably changed hourly.

The point of this post is that for anyone, with the possible exception of a few card-carrying members of the Valley elite, raising capital is never easy.  There may be some quick angel money, like we saw on stage at Launch, but that's just the beginning of the marathon.  If things go well for your venture, there may be very large rounds ahead, and by that time you'll have a lot of hard data on product acceptance, a history to explain, probably some founder turnover, and a few other surprises.  Due diligence will be much more diligent at that stage.  If things don't go so well but you have a plausible restart or recovery strategy, expect even more scrutiny.

Raising capital is work, and who has to do this work?  The senior management team is always going to be on point.  They are the ones on whom the bet is being placed and who must get to know potential investors, and they are certainly the ones who can be most convincing about the company's prospects.  Lawyers, advisors, and investment bankers can certainly be instrumental in the mechanics of the process, in making the right introductions, and in putting the company's pitch in the best possible light.  These parties can dramatically improve your odds of success, but you can never expect to do a clean hand-off with a "go find me some money" task.

Of course raising money takes your eye off running the actual business.  It's important to time your capital raise not only for maximum valuation but also for minimum detriment to the core mission.  If you need, say, $2M, it's probably far better to seek that all at once than to try a couple of tranches in hopes of giving up less of the company.  You'll finish one sprint tired and winded only to be immediately again in the starting blocks.  Meanwhile, you team will be spread pretty thin trying to accomplish the business plan.  And, your investor candidates will take more comfort in a round that buys enough runway for some major goal to be achieved, whether it's product milestones, customer counts, revenue, or even cash flow.  Then is the time when you can go back to the capital markets with enough leverage to drive up the valuation.  You can play more offense than defense.

I'd be curious what is Color Labs fundraising strategy from here.  Did they raise in one swoop all they will need to overpower their chosen market, or is there a much bigger round planned for the future?  It will be interesting to see how this plays out, and to see how this much money affects the plans of others jumping into the mobile/social space.