Your Startup Probably Doesn’t Need Funding – and Here’s Why
Ever wished your teachers had taught you money skills?
As the proud father of a two-year-old boy, I hope one day to teach him how to manage money so he needn’t worry as much about it as I did when I first started earning.
Your parents may have been very smart with their money — but years ago — parents didn’t talk about money. Parents used to believe that the school system covered the information about financial endeavors. Not so. You probably never learned what to do with your dollars until much later in life. Then, you’d earn the money and buy the stuff you liked, i.e., comics, books, music, food, and so on. We have all been there, done that.
The Proud Owners of a Startup
Today, as the proud owner of a startup, you’re probably much better at managing your money. You’ve survived the tough times to know what young people learn too late. But your biggest test of that financial insight is yet to come. Will you be ready?
Sometime in your future, an investor will offer you money in return for equity. You might even ask for it. While investors can seem like a solution to countless problems you encounter as a founder, don’t be too hasty to start eating from their hands. The cost of the money you receive may be more than you’re willing to give.
Investors Want a Quick Return
One, are you mentally and logistically prepared to accept funding? To delight your investors, you need to spend their money and earn them a return – fast. It might take the experience of growing and exiting two or even three startups before you know how to do that.
Secondly, just how badly do you need that funding? In this article, you’ll learn how bootstrapping makes you a better business – a leaner, smarter, more agile company that can roll with the punches. Would you sacrifice those enduring advantages for a lump sum?
Hold All of Your Questions — You May Not Need Funding
Don’t answer just yet. Let’s take a deeper look at why your startup probably doesn’t need funding. Knowing what you give up in return for investor dollars could help you discern when to accept an investor’s offer and when to say no.
Mo’ Money, Mo’ Problems
There’s a reason you don’t give a child your credit card. They don’t know how to make that money work for them and will instead succumb to impulses and instant gratification. Add a spending deadline into the mix and you might as well have set your money on fire.
I had plenty of offers to fund my previous businesses. One in particular from a famous VC in Silicon Valley. I turned them down. Why? Because frankly, I was in my mid-twenties and didn’t have a clue what I’d do with the money. Pimp out my office? Hire a bunch of new staff?
I wasn’t interested in that stuff. I cared about sustainable growth. Stacking costs early in your entrepreneurial career makes you vulnerable to failure. I wanted the freedom to fail and learn from my mistakes because I knew it would make me a better entrepreneur.
Once Your Accept Funding — The Stakes Increase
But once you accept funding, the stakes increase. Your failures become your investors’ failures, and that’s a lot of pressure. The clock starts ticking as soon as the money lands in your account. You might have 18-24 months to scale before you run out of money and goodwill.
Cards on the table, I raised funding for my latest business, MicroAcquire – a platform for acquiring and selling startups. I’ve built and sold three startups now and finally feel confident I know how to spend investor dollars. I’m not against funding in principle but raising it too soon.
Before you raise money for your startup, and I mean serious money, not a little seed or friends-and-family round, consider how you’ll spend it. If you can’t think of a strategy that results in growth and returns for your investors, you might as well not raise it in the first place.
Who Ate All My Pie?
I bet you’ve courted a few investor offers. It’s a good feeling, isn’t it? Like validation. A growing, profitable startup smells like freshly-baked pie to an investor, and they might offer you an eye-watering sum for a slice. Your pie might be small now but in five years? Who knows.
Only two things will happen to your startup in your lifetime: someone will acquire it or it’ll fail. I’ll assume you’re planning on the former. When your life-changing exit happens, do you want to take home the lion’s share of the proceeds? Then you need to retain the lion’s share of equity.
Bootstrapping Minimizes the Number of People Cashing in on Your Success.
Your employees and cofounders deserve their stakes since they’ve helped you scale to an exit. But – rightly or wrongly – you might feel differently when dividing funds between investors.
The more people you grant equity to, the more complex your payday. Will your market-driven valuation still achieve your exit goals once everyone (including the taxman) takes home their slice? If you’re in a rush to sell, will your investors allow you to accept less than your valuation?
Bootstrapped founders don’t have these concerns. You control the most equity, you decide when to sell, and you have greater room for negotiation (since you need please yourself and your staff only), increasing your buyer pool. That alone could be worth saying no to funding.
Keep Others’ Hands Off the Tiller
Your startup began in your brain. A little seed that germinated into something with purpose and potential. You nurtured that seed into a sapling, then a bush, and now a sprawling, verdant tree. No one knows your business better than you, and no one cares more about it.
But imagine someone telling you what to do with that labor of love you began from your dorm, study, or spare room. You might not realize how attached you are to your business until someone — a stranger — tells you you’re doing it wrong, to cut this and add that.
Before investment, you survive or thrive under your own steam. You’re lean, agile, and responsive to external changes, ready to test a new idea or head in a new direction. That’s the joy of running a business: You’re under no one’s yoke so are free to do as you please.
Startup Team Funding
It’s the difference between hedging and betting everything on a single horse. When investors fund your business on the condition you tie your goals to theirs, it may deny you the flexibility you need to survive.
If you make a mistake, they lose their investment but you (potentially) lose your shirt. Imagine squandering a million dollars to rush a product or service to the market only to realize your customers don’t want it. You might recover, sure, but at what cost to your reputation?
Consider what you would do with funding before an investor offers it. Plan for investment early as you would plan for acquisition. Where do you want your company to be in five or ten years? Will raising funding now help or hinder progress to that goal?
When the Tap Runs Dry, What’s Next?
One of the great things about bootstrapping is that when money is tight, it forces you to think creatively, to come up with ingenious plans and solutions. Money makes things feel easy, but it can be a false economy: What’s the point in growing revenue if it doesn’t come with profits?
Bootstrapping forces you to squeeze the best returns from the smallest budgets.
It teaches you to grow sustainably. Think of it as a training ground: Once you’ve spent years analyzing data, experimenting, and learning what works, you’ll develop a much better plan for investor funds.
A good analogy is that of the person born wealthy and the person who worked for it. Both might run out of money one day, but only one will know how to regain their wealth. Your most sustainable source of funding is your customers: Please them and the rest will follow.
Now, let’s return to the question at the beginning of this article: Would you sacrifice these benefits to raise funding from investors? I hope, now, you have a general feeling one way or the other. I recommend you trust that instinct when the offers start rolling in.
Image Credit: Pexels; Thank you!