It’s a question we at Designli hear from clients every day: “How do I find funding for my startup?” The answer to that can vary wildly, based on the stage their startup is in, their geographical location, even their race or ethnicity and whether that makes them eligible for loans and grants for minority-owned businesses. The question they should be asking, we think, is why they want funding.
If it’s a simple matter of money being the difference between an app getting built or not, then yes, capital will need to come from somewhere. But before focusing on how much money they can access, founders need to put a lot more thought into what goals that money can help them achieve and what that money will ultimately cost them.
It’s a price some entrepreneurs just don’t want to pay.
Angel investors, traditional loan sources, even startup accelerators, all take while they give, and a smart founder needs to decide if the deal truly offers value for the company.
First, the benefits, which are obvious – “I need an investor’s money to build my product/grow sales/pay myself/do lots of hiring/scale fast/get to market first.” Legitimate goals, all of them. But an infusion of capital isn’t the only way to get a business off the ground. Bootstrapping – going slowly – certainly isn’t sexy, but it can get the job done.
The other, arguably even better benefit to seeking funding, is the access you get to mentors. Venture capitalists are very often entrepreneurs themselves, and their advice can be invaluable to a young company. (But who’s to say you can’t raise money later in the game, when your company is worth more and you’ll be giving away less when you accept capital?)
The downsides to pursuing and accepting funding are huge. Let’s break them down.
“I need money to build my app.” This is basically a non-starter. No one will give you money before your product even exists. So let’s say you borrow from friends and family and are able to get an MVP out the door.
“I need money to pay myself.” Yes, a real concern. Paying yourself lowers your risk in the short-term as it enables you able to stick with it as long as you need to.
But, counter-intuitively, it’s riskier long-term, as dilutes your ownership of the company (when your company is at its lowest valuation, meaning you’re giving away a lot to get a little). Every dollar spent is a dollar of dilution. It also limits your exit possibilities, making you less likely to accept a reasonable offer in pursuit of a huge cash-out.
“I need money to grow sales.” Acquiring customers is largely a matter of good market positioning and product fit. While money give you lots of breathing room, money doesn’t come with insights, as a TechCrunch post titled, amazingly, “Venture Capital Is a Hell of a Drug” said recently. If you don’t know how to grow sales, all money will do is lure you into spending way too much on customer acquisition, setting yourself up for a cycle of huge burn, little traction.
“I need money to do lots of hiring.” Again, a big burn rate is a good investment when it’s spent to grow a model that’s working. Too often funding is used to bring in new bodies that hopefully have new ideas about how to increase revenue. An already correctly positioned product and a team that can sell it will eventually create enough revenue to warrant hires when they’re needed.
“I need money to scale fast.” The worst reason of all. That’s ego talking, and exit value is nothing more than a vanity metric. There’s a reason they’re called unicorns. Besides, it’s possible to have a huge exit and walk away without much cash in the end. (Remember all that equity you signed away while chasing capital?)
“I need money to get to be first to market.” There will always be competitors. Even if you’re first in the space now, that won’t last long. Focus on differentiating your offering to give you the momentum to survive in the long run.
So, what is the takeaway here? Think about your path to building your initial product and beyond. Can you bootstrap it, or do you need investment? If you need to raise investment, that is A-OK and there are plenty of examples of companies that have done it well. However, do your best to think about the current cash landscape before making the plunge. Note the pros and cons, and make the decision that is ultimately best for your business in the long term.
It’s your business, after all! You’ll need to make more and more decisions like these as time goes on. Feel free to contact us if you’d like to get our perspective, as we live in this world each and every day. Good luck!