Investing money in your startup and how much
Building a startup is a long process and requires dedication. It will test many sides of you.
All of us wonder whether we should be taking dollars from our personal savings and putting them into the startup. If we don’t put any cash, we are not giving any chance for growing to whatever we are trying to build. On the other hand, if we spend all the money we have in our savings account, we remove any safety net we have built.
It all comes down to understanding how you define risk and then manage the risk. Some of us have a higher threshold for taking the risk, while others are not comfortable if they only have a couple of months’ worth cushion in their bank accounts.
So, do I spend it or save it?
As I said earlier, it is all about risk and risk management. This simply means you need to look at the money you put into your startup the same way you would with any other investment. It should be money you feel comfortable loosing.
We all have a ‘breaking point’ – once we exceed the amount, we are comfortable spending, our focus shifts from ‘growing the business’ to ‘surviving mode’. This puts everything in jeopardy – the business, our health, personal relations, family.
If you don’t know your ‘breaking point’, a good rule of thumb to follow (borrowed from the investment community) is for beginners to invest no more than 25% of their money. This will give you the power to develop your startup and at the same time avoid the danger of switching to ‘survival mode’.
Another way to look at this is to analyze how much time you will need to live on savings before you can bring some income. For example, if your startup is gone and you need to find another job, estimate how much cushion you will need. Hopefully, you know how much time you will spend looking for a job and leave enough money in the bank to support yourself and your family for that period.
Again, you need to be looking into money put into your startup as an investment. This means if you find yourself saying “I can afford to put a couple of thousand dollars into my startup” after you have reached your pre-defined limit, you are gambling, not investing. This is a bad habit and will lead to bitter results.
Use the pre-defined limit as a trigger to re-evaluate your idea, your company, marketing strategy, and fund-raising approach. It might be the point you need to admit failure and move on.
When will I be able to get those savings back?
Most likely – never, as statistics show. Majority of the startups never make it, so you should not expect to see your money back anytime soon. As I said, you only need to work with the amount you are comfortable losing. The time to recover your savings should include the amount, plus lost opportunities and tax implications. It may turn out that you will need twice as much time to recover than the time you initially spent to save.
One important thing about investing your own money is to keep detailed records of your spending. If you are with the right mindset to look into putting money into your startup as an investment, you should be doing this with no problems. Showing complete records of how you used the money will show your investors that you are a responsible persona and know how to manage finds.
What if I don’t invest at all?
We all say, “time is money”. You would probably expect to hear that the time you have dedicated to developing your startup has a monetary value. Unfortunately, it is not true.
My personal experience is that investors somehow forget or don’t know this widespread understanding. Somehow, they expect to see hard cash being put into the company and the time to build the product is not seen as an investment. Or at least they don’t put any momentary value to it. For investors, time is not equal to money, when it comes to developing your product or service before somebody puts their hard cash into your company.
Looking from the investors’ perspective, this (mostly) makes sense. Until you go through an evaluation process, all you have done so far can be treated as nothing more but a hobby. To have value, you need somebody to determine it for you. This means that the value will be “market value”, not the time you have spent in development. That is why the time you invest is not converted to any immediate value.
Do I need external investment?
This is probably the most important question you need to ask yourself before getting on the treadmill of raising funds. Funds from angels, investors, and VCs are the most expensive ones you will get. You will be giving up a huge portion of your company and it may come to a point where you will not be able to recognize your initial idea because your investors wanted to go a different way.
Raising money is a long process and has no guarantees. It takes networking and looking for the right investors. Going to a lot of meetings and receiving multiple rejections every day. All this simply means that you will be focusing on a problem which has nothing to do with bringing value to your customers, nor it helps you build your dream. In many cases, it is much more productive to work on your product instead and focus on marketing and sales. If you don’t have sales it will be almost impossible to be funded anyway.
We all tend to follow the described path of raising funds to build our startups. While there are entrepreneurs focused on providing value, discovering their true customers and fine-tuning their products. These entrepreneurs only seek investors when they have enough sales and customers to show data and results. In most cases, investors are already lined up at the door of that startup and are begging to invest. Money at that point is to expand, not build.
There are many ways to determine if your startup needs investment or it can be bootstrapped. Usually, if you are building a product or service that are “improvements” to such existing products or services, you are the perfect candidate to bootstrapping your company. This means any “faster”, “cheaper”, “smaller”, “bigger”, “better user experience”, “great design”, etc solutions are candidates for bootstrapping. Anything that is a technology breakthrough, new science or methodology, an environmental solution is what VCs are interested in. It needs to be impactful, scalable with a great ROI.
Look at putting money in your startup as an investment. Treat it as an investment and apply all rules and methods you would apply to any other investment.
Learn how tolerant to risk you are and understand how comfortable you feel when loose money. Do not put more than 25% of your money into this high-risk investment. Make sure you have enough cushion in your bank account to support yourself and your family until you find a job if this whole venture fails.
Analyze your business and make sure you really need to look for investors. Can you build it with your team and not rely on external funding? This will save you time, will make you a much stronger player in your niche and will eventually attract investors later.