The Capital Delusion: Why Founders at Every Level Get Funding Wrong

Every business needs money to survive. Your sweat equity matters, but it can only take you so far before you need actual capital to keep the engine running. I previously wrote in my article "WTF is an Ecosystem anyways?" about how startups are the producers and funding sources are the fuel that keeps the whole ecosystem alive.

So why do so many founders get this wrong?

The need for capital is obvious, but what's not obvious is how to approach it, where to get it, and what to do with it once you have it. That gap between knowing you need money and knowing how to handle it is where the problems start.

First and foremost, founders struggle to think of their idea as a business model rather than just an idea. It's no secret that founders fall in love with their ideas, otherwise they wouldn't be so committed to bringing them to life. That's great, but it presents real challenges, particularly with funding.

The survival rate for new startups is daunting. According to the U.S. Bureau of Labor Statistics, roughly 20% of new businesses close after one year, 50% by five years, and 65% after 10 years. The number one reason for this? Running out of cash. CB Insights found that 38% of failed startups cite running out of cash or failing to raise new capital as the cause.

Why Founders Struggle

They have no idea what they need or why they need it.

Founders focus on their idea and why it will be amazing, not mapping out every cost they can expect and then how those costs will eventually convert into revenue. They're dreamers, not rigid accountants with the inherent instinct to look under the hood and examine everything down to the cent.

This can be an overwhelming and pessimistic process because it can quickly expose that the business model isn't viable, and that's not where founders want to go with their new idea, the one they'll do anything to protect, including avoiding the hurtful truth that they might have an ugly baby.

Ideally this gets caught early and sends the founder back to Excel to figure it out before getting capital, but in bad situations, it goes undetected until they have the money and then it's a disaster. It's like giving a kid a thousand dollars to spend at Target.

They're in it for the wrong reasons.

This applies more to founders going the VC route, but there's definitely a mindset among some that raising money is the goal. It's strange because it's almost like everything is built to race towards investment rather than race towards revenue, and fundraising becomes a vanity metric attached to the founder's success and the startup's perceived validation.

Here's how I think about it: founders treating fundraising like the finish line is like a marathoner who trains obsessively to get a bib number but never actually runs the race. The bib isn't the achievement, it's just permission to compete, and capital isn't success, it's ammunition.

Founders get their sights set on something and they go, and that single-minded focus is what makes founders dangerous in the best way. It's a blessing and a curse. The blessing is obvious: you move fast, you take action, you don't overthink yourself into paralysis. But when that tunnel vision extends past the financing part and you haven't thought through what comes after, that's when you have a problem. Because once you have the money, the real work begins, and if you've spent all your energy on the chase, you're not prepared for what comes next.

They don't know where to get it from.

Why are you going after VC dollars when you could get an SBA loan? Why do you need an SBA loan when you have personal investment set aside for the business?

I find it interesting how many people go through the motions of seeking capital when it's not even the right fit for their business. It becomes this default pattern where founders just follow what they think they're supposed to do without questioning if it makes sense for their business. I'm doing a startup, so VCs are the answer. I'm opening a small business, so an SBA loan is the way. There are countless factors that need to be considered to determine the right fit, but that process of finding the best match gets ignored entirely.

And finally, their expectations are completely off.

People start this process with the wrong idea of what to expect, often because they've never gone through it before and genuinely don't know how it works or what to expect. I speak with founders all the time who have this expectation that the money will just fall into place. They think if they build a good enough product or have a compelling enough pitch, the capital will materialize. Or even worse, they're banking on free grant money to fund their business based on an online video. But it doesn't work that way. Getting funding takes a lot of diligence to plan out and requires a strategic approach to understand who you're talking to, what they're looking for, and how you fit into their investment thesis.

Here's the reality: no VC or angel investor owes you money, and hearing "no" is part of the process. In fact, you'll hear it a lot more than you'll hear "yes," and that's normal, not a reflection of your worth as a founder. Just this week, a manager from a leading angel investor network told me about a company that was a perfect fit on paper and could have been an investment, but they had already hit their limit for that industry for the year. It could check all the boxes, but the timing could be off.

At the end of the day, your business is an investment to them. Yes, it can be a genuinely collaborative relationship built on shared vision and mutual respect, but it's still fundamentally a financial transaction with expectations on both sides. That means understanding what they're looking for, what they need to see from you, and what success looks like for them, not just for you.

The same goes for debt. That SBA loan that hits your account isn't free money, it's a commitment you're making to pay it back with interest. You need to have a clear plan for how you'll service that debt while still growing the business, and that plan needs to exist before you sign the papers, not after.

Money going into your business is much more than a dollar figure, and there's a psychological piece to all of it that gets overlooked. You're entering into a relationship, whether it's with an investor, a lender, or even yourself if you're self-funding. There's the weight of expectation, the pressure of performance, the responsibility of stewardship, and the stress of knowing that decisions you make today will affect not just your business but the people who believed in it enough to put money behind it. All of it needs to be considered and built into the expectations up front.

Final Thoughts

Remember what I said at the beginning: capital is the fuel that keeps startups alive. But fuel without a plan is just combustion. The founders who succeed aren't the ones who raise the most, they're the ones who know exactly what they need, where to get it, and how to deploy it before they ever ask for a dollar. Treat capital as seriously as you treat your product, because getting the money is just the beginning, not the achievement.

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‍Sebastian Penix is the Entrepreneur Ecosystem Navigator for the Central Indiana SBDC, based at Butler University’s Lacy School of Business. He is also the founder of Heartland Valley, a platform spotlighting startups and innovation across the Midwest. His work focuses on building connection, visibility, and momentum within the region’s entrepreneurial ecosystem.