Does Your Startup Really Need to Raise Money?
Updated: Aug 20, 2018
So you've got an idea which is going to be a clear disruption in the market. All you need is some stranger's cash and you're you're set, right?
The requirement of startup fundraising is born out basic concept that a new company requires a long runway of product development and market penetration before profitability. That statement seems both simplistically obvious and overly vague at the same time. But at it's core, it means that venture funding is required when "bootstrapping" isn't feasible.
The folks at Entrepreneur aptly describe it as "starting a new business on a limited budget without investor involvement." For a practical example, we can look at how I started Calculate.
I struck out on my own with no clients and few prospects. I could have raised some money through a loan or equity but what would that have gotten me? I could have paid myself a salary or hired help, but I wouldn't have been investing in anything tangible. My real challenge was that I need clients and raising some money wasn't going to make them magically appear.
So instead, I bootstrapped Calculate to profitability. By tapping into my network I was able to get my first couple of clients. Then, with a little elbow grease, I was able to add new clients one at a time, establish consistent revenues. and eventually expand the business. This "brick-by-brick" approach is the core of bootstrapping but doesn't work for every situation.
When Outside Investment Makes Sense
If the time and capital requirements for your business to reach financial stability through bootstrapping are too great, then outside funding is a logical path. Two common examples are when you're looking to build a complex product and when the minimum number of required customers can't be acquired in a one at a time fashion.
Building major products, like a technology platform or biomedical device, can take months if not years to mature . During that time the your business will incur many expenses including the substantial costs to support a team. For this, investment helps supplement these expenses and provide runway for you to build a marketable product without cash flow pressures.
Another instance for using investment funds is customer acquisition. Maybe you have a product or service that isn't too complex, but you need a lot of customers to make the business profitable. Using "elbow grease" like ramping with Calculate isn't going to get the volume customers you need in a timely manner. Instead, you can use some of the funds raised to pump into marketing and sales to accelerate the addition of new revenues.
Giving up Ownership
One side of the investment equation is the needs of the business. The other side is your ownership. Investors aren't just giving you this money as a gift, they're buying part of your business! So part of this is also a acceptance to give up some of your equity in order to accelerate the growth and realize that potential.
For some, that can be a tough pill to swallow and there is no clean answer. Ultimately it's a hyper-personal question about growth, control, and the business you want to build. Would you rather own 100% of $1MM or 10% of $100MM? Can you build something worth $100MM without securing investments? Do you even want a business that big?
These are all considerations when charting out into the startup world. Whichever path you choose, it's important to understand the fundamentals of a business that can bootstrap its way to profitability versus one that needs outside investment. Now what to do with that investment money is a discussion for another day, but hopefully you're on the right path for the direction of your startup.