Prashant Gulati says that TechCrunch should be banned in the Middle East. That’s not because he isn’t a big fan of the site, but because he says it “puts some naïve and green young ones at a disadvantage”. The Dubai-based technologist and angel investor funded a startup recently. Soon after he made the investment, he learned that the majority of the money had been withdrawn from the bank. The young company founder—who previously had been unable to make ends meet—was seen driving around in a fancy red Corvette. When confronted, the founder retorted that he hadn’t started his business to live the life of a hermit; he needed to keep his girlfriend happy and enjoy life. Since he had achieved success by raising capital and was now famous, he was entitled to live the high life like all the people that he reads about—on TechCrunch.

Prashant had no choice but to bear the loss and to coach the founder.

I know that many Silicon Valley investors will be able to relate to Prashant’s frustration. With the attention that new investments receive and the fanfare for business-plan contests, it is easy to believe that once you’ve raised capital, you’ve made it. So fledgling entrepreneurs often spend the majority of their time developing sexy PowerPoint presentations and pitching to investors rather than building their business.

The reality is that the vast majority of startups never receive any angel or VC financing. Harvard Business School professors William Kerr and Josh Lerner researched the investment decisions of one of the largest angel-capital groups—Tech Coast Angels. They learned that 90% of the 2000+ ventures that approached this group garnered the interest of fewer than 10 angels. That meant that they had no chance of receiving financing. Two percent of the ventures received interest from between 35 and 191 angels—giving them, on average, a 40% chance of getting funded. In other words, most entrepreneurs simply wasted their time pitching to these groups. Most of those startups were probably still working out of their garages. My team researched a sample of 549 that had made it beyond this stage. We learned that only 9% had raised any angel capital and 11% percent had raised venture capital at the later stages of their growth. Such funding isn’t, then, a prerequisite for success.

So startups that raise angel or venture capital are the exception rather than the rule. And, as I’ve written, having too much money may actually lead to bad habits. No doubt, most entrepreneurs who raise capital are a lot more sensible than the one who bought the Corvette. But in my experience, companies on tight budgets usually perform far better than those that are well capitalized. And they have the freedom to do what is best for them rather than focus on an exit for their investors.

Alex Moore and Mike Chin did things the right way. They tested and validated their ideas for an e-mail-management startup, Baydin, for nearly 16 months before pitching to investors. It took that long for them to learn what customers really needed and to develop the right products. Their initial target was the enterprise market, and they built search tools that integrated with mission-critical systems. The technology worked well, but they could not get enterprise customers to buy from their startup. So they decided to, instead, target consumers and develop a different suite of products.

After crossing the 70,000-download mark and getting positive customer reviews for their Boomerang e-mail–reminder product, Alex and Mike decided to approach investors. It didn’t take long for Dave McClure, an angel investor, to write a check and agree to lead a $300,000 financing round. Alex and Mike plan to use the funding to grow their user base and perfect their business model. They will go for venture capital once they get this right.

Some entrepreneurs decide not to raise capital, even when they can.

Jesse Lipson graduated from Duke University in 2000—right after the dot-com crash. He says he saw the “damaging effects that venture capital had on an entire generation of tech firms” and decided he would never take that path. Instead, he took inspiration from the founders of Papa John’s Pizza and decided to build a business in a big, established market that could succeed on a small scale. In 2005, he launched ShareFile, a file-exchange website, with one server and a Google AdWords campaign. To pay the bills, he worked for his wife’s company—Brooks Bell Interactive (which he says was better than having to answer to VCs).

His firm grew slowly at first, but he kept investing every cent of revenue in the business. Today, ShareFile has 40 full-time employees, is #104 on the Inc 500 list (#8 in the software industry), generates over $10 million in revenue, and is highly profitable. Jesse says he has VCs tripping over each other to offer him money. But he has no interest.

The point is that entrepreneurship isn’t all about raising money. The money is something you should use to help build traction for company growth, not to alleviate your personal risk. Angel capital can help you get the business model right once you understand customer needs. Venture capital can rocket your company’s sales once you have a solid business model—and not before.

Editor’s note: Guest writer Vivek Wadhwa is an entrepreneur turned academic. He is a Visiting Scholar at UC-Berkeley, Senior Research Associate at Harvard Law School and Director of Research at the Center for Entrepreneurship and Research Commercialization at Duke University. You can follow him on Twitter at @vwadhwa and find his research at www.wadhwa.com.