Quick: What's stopping you from creating the next hot-ticket startup? If you're like many entrepreneurs (be they "wantrepreneurs" or serial businesspeople with a history of success), the biggest hurdle isn't an idea; it's cash. Plenty of folks have a kernel of inspiration, but to borrow from high school chemistry, the limiting reagent is often money as opposed to ideas.
Money (Photo credit: 401(K) 2013)
Even when committing to an idea, founders quickly learn choosing a funding plan can be just as important as picking a business model (and the two are often intrinsically connected). Do you raise capital right off the bat, surrendering a chunk of your fledgling company and decision making power for a quick influx of cash? Or do you bootstrap for as long as possible, minimizing costs but risking getting left in the dust by better-funded competitors?
Funding is never an easy decision, and it's one founders return to often as their companies experience success and speed bumps along the way. I spoke to four entrepreneurs — three serial founders and one VC-turned-entrepreneur — about what went into their choices on the path to fundraising and exactly where their strategies shifted. Their common advice? Aspiring entrepreneurs, take note: A shift in funding strategy can make or break a company. Regardless of industry, keep your game plans flexible.
Who They Are: Matt Salzberg, Co-Founder and CEO of Blue Apron.
How They Funded: Raised capital to ramp quickly.
"We raised money before we launched Blue Apron because we wanted to be able to move quickly. The biggest cost of starting a start-up is your time, so speed is everything. I also had familiarity with the fundraising process from my time as a VC, and personal relationships with all of our investors. If I wasn't personally comfortable with and familiar with all of my investors, I would have been less likely to raise money at this stage because its important to be able to change what you're doing quickly if its not working. Without investor trust, this can create a lot of tension.
Very few early stage companies stick to their original game plan, and we are no exception. The company grew much quicker than we ever expected, so we raised additional capital to invest behind that initial success.
I think if you raise capital very early, you need to be personally comfortable with your investors — both as people and as decision makers. You should understand how they think and make sure they think the same way you do so when you reach a bumpy road you'll be aligned.
Once the company has a clear direction and growth opportunities, capital raising is much more straightforward. If you can invest $1 to make $10 later, raise a war chest and put your foot on the gas!"
Who They Are: Shayne Woods, Founder and President of FwdHealth.
How They Funded: Bootstrapped for minimum viable product and raised capital to scale.
"Bootstrap as long as you can. If you can get to revenue before taking someone else's capital, do it. Money is not free. Too much debt/liability can cripple a startup. Lose your equity, lose your control, lose your company. As a business owner, you are always racing against the 'cash clock.' At FwdHealth, we managed to stick with our goal of bootstrapping a minimum viable product to market and reserving a capital raise to iterate and scale on what has been experienced by our customers. The path of least resistance to revenue became clearer as our product moved closer to market.
[K]now specifically what you are raising capital for and have it tied to some measurable deliverable. Investors want to know specifically how their money is being spent and see that investment bear fruit. Additionally, be realistic on the scale and time for investment deliverables. Under-promise, over-deliver, and make sure you have enough of a runway into your next capital raise. It is much easier to raise money (on your terms) when you have money. Finally, do your research and know your investor. They are definitely doing theirs. There is such a thing as 'the wrong money.' Nothing is worse than taking money from someone who is not on the same page as you are or has a poor reputation in the industry you are building in."
Who They Are: Diana Charabin, Founder of Tiny Devotions and Co-Founder of Cole and Parker.
How They Funded: Bootstrapped to maintain control and crowdsourced to scale.
"My first company, Tiny Devotions, I started right our of law school and had no capital at all. I was fortunate enough to have stumbled upon a small government grant for 3k. I started my business with this grant and then organically grew it with no capital at all. At the time I knew nothing about business or fundraising and I never realized that there was capital available to entrepreneurs. Not taking any external funding slowed me down but that was actually a positive.
By growing this business organically I had very little risk. I couldn't afford to make big mistakes (because I just didn't have the cash). I only made the mistakes that I could organically afford to make which allowed me to create a really smart business.
My second company, [high quality sock manufacturer] Cole and Parker, needed substantially more money to start. I was fortunate I was in the position to supply seed capital for the business.
As we were writing our business plan and figuring out how much our first sock order was going to cost, we were also following a lot of Kickstarter and Indiegogo campaigns for fun. We realized that launching a crowdsourcing campaign would kill two birds with one stone:
1. Help us with proof of concept and marketing.
2. Help us raise more startup funds and mitigate risks of completely self-funding.
We also had the opportunity to receive external funding, which we decided against as we wanted to keep full control of the direction of the company."
Who They Are: Jeffrey Crews, Vice President of WeightTraining.com, Vice President of Bookster.com, and Co-Founder of SincereInk.
How They Funded: Self-funded, used investors to bring in capital and new team members.
"For WeightTraining.com, we knew that we had the team and idea in place to test the market with a workout-logging platform while still having the luxury of being self-funded. During the beginning stages we quickly found out that there were other markets where our software could be used and that allowed us to adjust our game plan to hit those areas and implement new features. We never received any outside funding and today are very happy that we have full control over the company.
With Bookster, we understood our overall goal and had the game plan in place to execute. Bookster’s goal as a startup is to help authors connect with their readers, earn incremental revenue, obtain customer information, and help build their brand. Much like WeightTraining.com we had the team on board to execute and were lucky enough to be self-funded from the start. Bookster has a different revenue game plan as we realized it would be more of a marketplace compared to the freemium and B2B model of WeightTraining.com.
SincereInk was my first co-founder venture. My partner and I founded SincereInk to make it easy for businesses to send sincere, handwritten cards. We help businesses make a personal interaction with their clients without all of the hassle of writing, mailing, and managing customer outreach. At first we started with a bootstrap model but quickly realized that we would need a support team. Our investors were able to bring some key members to the table that made it very worthwhile for us to accept the investment and continue on the path of building a great customer outreach platform."
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