Funding Choices
When talking to startup founders I very often see people who don’t understand how the funding actually works.
No matter if you have done it before or this is your first startup, it is never easy to get things running. The only way to reduce the frustration and to put yourself on the success track is to get educated and understand how the funding works. And of course, to manage your expectations.
Securing start capital is not a defined process. It is different in every case. Each angel, investor, each venture fund is different in terms of selection, funding, and managing processes.
The usual choices that a founder has when starting a company can be grouped into three categories:
Bootstrapping – Using your own capital to start the company. This includes your savings, living on credit cards, and any other way you can get ‘retail’ type of funds – money available to everybody for commodity purposes, but you have decided to use it to create an asset.
Debt – Borrowing money, when possible – banks, friends and family, some of the angel investors or financial companies may decide to go with this option. Debt is really only available if you already have built some wealth because you will need it as collateral against what you borrow. Remember that credit cards very quickly move you from bootstrapping to debt, if you cannot cover your payments.
Equity – Receiving money in exchange for a piece of your startup. This is the most expensive path – selling parts of your asset in order to grow it. In many cases, this is the only way to scale and grow fast. Investors in this category include angel investors, venture capitalists, and don’t forget friends and family too.
Most likely you will end up mixing funding sources. There is no clear cut where your own savings end and where you go into debt in many cases. In addition, many times when you talk to investors, they want to know how much of your own money you have put in into your startup, before looking for outside funding.
Starting Up On Your Own Terms
Most businesses get started by a founder putting together all that is needed to launch the company. Very few in fact have ever started with receiving the big check first (contrary to what Hollywood shows us).
It is very important to find a good partner to mitigate the risks, split the burden and the work. Investors want to see teams, not individuals when making their investment choices.
Bootstrapping requires you to look first in any capital available to you without reaching out of your immediate circle – talk to friends, family, your employer, or ex-colleagues – explain your idea, pitch, and receive feedback. It is all very useful – you may not only receive funds but also could find your first users.
My experience is that interestingly enough, investors don’t put too much value on the time you spent to develop your own idea. So you cannot convert your time to ‘money invested’. This may be the only case where ‘time is money’ fails. Angels want to see your own hard cash being used before you go and ask somebody else to trust you with their hard-earned money.
There is no right answer to when to start seeking outside capital. It depends on the investor you are going to pursue. Some investors are OK with just an idea and marketing research, others are looking for more developed products and even some traction. All this means that a ‘No’ from an investor simply means you have not done your home work and you have not approached the right one.
In general, the further you are in your process of establishing your business, the more funding opportunities you will get.
Bootstrapping is a very healthy approach. This shows your intentions is to create a real business. You are going through many steps to figure out what you need to keep afloat and you understand the complexities of the business you are getting into.
Just a few of all startups manage to attract angels. Keep that in mind and think about what you want to do if you don’t find an investment – are you going to do everything possible to build your business or you simply give up on your idea.
When you are bootstrapping, you are not focused on raising capital but on your business and your product. You are making your idea a reality. In many cases, this is a winning strategy, because it helps you focus on what your customers need. Having satisfied and many customers are something that always had value and it will be eventually noticed by investors.
In other words, by building the company with your own funds you become more attractive to investors. You show you can handle cash flow, you are capital-efficient, you understand and willing to do whatever takes to keep your doors open. And by being focused on your company, you have paying customers, which makes the investment decision quick and easy. At that point, investors will be interested in joining you.
Bootstrapping Is A Viable Option
Bootstrapping is a healthy approach to building a startup. Whether you plan to use outside capital or not, it is always a good choice to start with your own resources, find a good partner, and invest time and some of your funds into your idea. Investors prefer bootstrappers because it shows character, grit, and builds experience.
Get as far as possible with your own means of building your company and only then seek investment. Make sure you time it right, so you don’t run out of capital before you are funded. It is an art to know how long you can stretch your bootstrapping magic and when you should turn to somebody else to use their resources to continue your growth.
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