So you need to raise money?
I can hear it now … the sounds of Frank Sinatra swooning … “Luck be a lady tonight,” and the thoughts of sugar plum VC fairy’s dancing in your head.
Often when an entrepreneur considers financing they think of OPM – “other people’s money.” In other words, they’re in search of the proverbial VC or angel “Daddy” Warbucks.
And why not? It appears easier than pulling yourself up by your bootstraps, operating on a shoestring budget, and finding creative ways to make it work. Who would blame them? Read the latest startup headlines and you’ll get a daily dose of: Bright young thing closes Series A funding round for $2 million, new VC-backed company claims it’s the match.com for your pet, high-risk friends-and-family investment hits pay dirt, etc.
But hidden beneath the headlines is the not so glamorous side of VC funding, in particular. You know — VCs not hesitating to fire the founder of the company if they find him/her incompetent, the realities of venture debt, or the fact that your business is not VC fundable at all.
Is OPM a spawn of all things evil — of course not. But the reality is this: many successful companies launched with an idea and a founders’ personal investment of time and money. Those not-so-sexy bootstraps have paved the way — and could do the same for you.
What keeps entrepreneurs from investing in their businesses?
As Peter Shallard, the shrink for entrepreneurs, suggests, “There is only one type of investment that can be made within a business: The kind that brings in revenue. That adds to the bottom line. That makes money. In other words, when we put money (or time!) into our own businesses, there needs to be a return.”
It’s often a hard decision to make, parting ways with your hard earned dollars to chase a dream, especially for new entrepreneurs who feel as though they’ll put everything on the line.
How can savvy entrepreneurs bootstrap their businesses?
Before you start hounding local VC’s or your local business banker, consider this: people want to invest in traction – proven success. Most people want to invest in a founder who is truly – emotionally and monetarily – invested in their vision. In practical terms, if you refuse to invest your own money into your business, why should anyone else?
This is why savvy entrepreneurs will invest in their future by first investing and then re-investing into their business early on. In fact, there are numerous companies that are bootstrapped, profitable and proud. You can be one of them. Here’s how:
Focus on cash flow – not profitability.
Launch your small business with a creative outlook – bootstrap it all the way to success, or at least cash flow. Guy Kawasaki notes how important it is for startup to focus on cash flow instead of profitability. Kawasaki suggests, “the theory is that profits are the key to survival. If you could pay the bills with theories, this would be fine.
The reality is that you pay bills with cash, so focus on cash flow. If you know you are going to bootstrap, you should start a business with a small up-front capital requirement, short sales cycles, short payment terms, and recurring revenue. It means passing up the big sale that take twelve months to close, deliver, and collect. Cash is not only king, it’s queen and prince too for a bootstrapper.”
Think smart about financing your startup.
Most entrepreneurs think they’ll have to max out their credit cards, empty a 401k, head to the local blood bank and surrender their first born in order to bootstrap a small business. Thankfully, with the financial barriers to entry at historical lows, you can start most businesses without setting yourself up for future financial headaches. Start by taking an honest look at your personal finances. If you don’t have a personal or family budget, now is the best time to create one.
A budget is important because it can help you ensure that you’re spending less than you’re bringing in and plan for the short and long-term. A budget can also enlighten you on areas that you could essentially “cutback” and reinvest into your business instead. Reign in your personal expenses and redirect the savings into your startup fund. With tools like You Need A Budget, Mvelopes, or Pearbudget, budgeting is less complicated and less time consuming than ever before.
Build your minimum viable product (MVP) or service.
Bootstrapping a business doesn’t always leave room for the bells and whistles. This can be a good thing. According to Jeremy Hitchcock, CEO of Dyn, an Infrastructure as a Service (Iaas) provider, “When you start out, you are constantly thinking about dollar one — the first customer that actually pays you for your service.”
Hitchcock experienced this first hand: “While we asked for donations to keep the project going, we also simultaneously launched a paid version of the service with additional features. When people are willing to part with their money because you deliver value, you’re onto something.”
Can startups bootstrap and still be successful?
Absolutely! Putting your own seed money into your business is risky and rewarding. For example, you can build a billion dollar business starting with $5,000. Sara Blakely, the founder of Spanx did just that. “Sara had only $5,000 in savings on that fateful day when she cut the feet off of her stockings in order to wear them under her white pants for a more flattering look (and thus, realized the world needed a new undergarment product that would be comfortable yet flattering to the female form). From that $5,000 she embarked on designing a prototype, securing a manufacturer, naming the product, legally protecting her product, and getting the word out to potential buyers,” according to a Forbes post.
Ultimately, is raising outside investment a terrible thing to do? The answer is “No.” Your business situation is unique. Complete your due diligence to decide what funding option works for your company. But as, angel investor and wine entrepreneur, Gary Vaynerchuk has said: “I’m concerned a little bit with the culture of celebrating the fundraise … My dad taught me that when you borrow money it’s the worst day of your life.”