To seek funding or not to seek funding: how did you decide?

February 6th, 2016

I know the big trend in start-up landing is to go after funding, get big and exit, but most of the businesses I've been exposed to growing up and in my network as an adult have been more privately owned companies and corporations without outside investors. I know the pros and cons of the decision, what I am looking for is a more personal look at it: stories of others decisions and experiences.

which factors influenced your decision?
Which way did you decide?
How did it play out?
If you could change your decision, would you?
etc.

Peter Johnston Businesses are composed of pixels, bytes & atoms. All 3 change constantly. I make that change +ve.

February 6th, 2016

Reid Hoffman defines a Startup as a small business which is going to be big - that defines the mindset.

For a small business it is nice to do everything yourself, keep control of the finances, not have too many shareholders etc. For a big business you need partners - people who can open doors and throw you in, who can find you big funding and who have the credibility to attract the big people as employees, partners etc.

That is what VCs offer which few angels can match. They form an academy which throws startups in with others and which has a feeding frenzy of top people circling them, looking for talent to pick out and make big. You have a fast learning programme and opportunities all round you.

The downside of this is they aren't really part of your business plan, you are part of theirs. They are driving the escalator, you're just along for the ride.

So if your goal is to have a few percent of a major, publicly traded company and all the hassle of stockholders, media attention and lots of employees, choose the VC route. You'll probably burn out but if you can ride the bull well, you fall off a rich person after a few years.

If your goal is to run your own business without a boss or anyone to answer to, then this isn't the route for you. Far better to choose friends as co-founders, find a high net worth individual who believes in you, exploit all the government grant funding and make friends with your bank manager.

Of course, if you simply want to see your idea happen you have to choose. Perhaps your idea would be better off as a brand under Google or Facebook - they can scale it in ways you could never imagine on your own. Just remember the days of lifetime value from a brand have gone - product lifecycles are now a couple of years, whole company business models change every five. What is a cool idea now will be old hat before you've even got there, if you grow it yourself.

Designing for high growth and sale is one strategy, building a company you control is quite another. Choose before you start - switching horses halfway can leave a bloody mess in the middle of the road.

Adam Crabtree Founder, Strollbar

February 6th, 2016

Larry,

The irony is strong with you, lad! I think your own post could make for a text-book example of embarrassment. There’s nothing wrong with what Michelle is inquiring. Just look at the feedback so far from the “audience”. It seems to be a post worth answering. If you find Michelle’s question misguided, why not hold those who've responded just as accountable for considering it worthy of feedback?

John Seiffer Business Advisor to growing companies

February 6th, 2016

What most people don't understand is that the choice is not up to you. At least not entirely. For certain business models in certain markets selling equity makes sense. For the vast majority of companies it doesn't. For others who said the same thing and are more prominent then I see this blog post.http://www.ceobootcamp.com/should-you-take-vc/

Mike Mitchell Consultant: Technology Development and Management

February 6th, 2016

Most people take it because it is supposed to make everything easier. It doesn't, and it forces decisions to be different. Bottom line, unless you really need the money and know exactly what you will do with it, don't. Then if you do, look at each investor like you are marrying them.

Dimitry Rotstein Founder at Miranor

February 6th, 2016

It is up to the founders to decide their ultimate goal: a) build a "lifestyle" business (private source of income that will hopefully endure at least until they retire), or b) build a startup (exponentially growing business that either leads to an acquisition/IPO/buyout or dies out - there's almost no middle ground).

In the former case, investment is basically a loan that you have to repay later. If you can build a lifestyle business without such a loan, then don't take it.

In the case of building a startup (to which I subscribe by default), the question is not WHETHER to take investment, but WHEN. The timing has to be precise too.

If you seek funding too soon, then you will most likely waste your efforts (investors won't risk entering too soon), and even if you do find an early investor then you risk premature scaling, which is known to kill even the strongest startups.

And if you seek funding too late, then you risk being overrun by the already funded competitors/copycats. You can hope that they will fail, or make an exit and cease to exist, or become so big they will acquire you, but that's a huge risk to take on purpose. Also, the investment is by far the best way to determine the valuation for the startup, and valuation is the key to a good exit. In fact, Instagram and WhatApp made very large rounds shortly before acquisition to boost their valuation. I can't think of a single startup that made any substantial exit without investment.

Dimitry Rotstein Founder at Miranor

February 6th, 2016

In addition to my previous response, a more personal one.

So far I've been in two startups that tried to raise a seed round. Both attempts came too soon (with a working prototype, but no customers) and, naturally, were a total waste of time. In fact, it felt more like "Groundhog day": you arrange a meeting with potential investors, spend days preparing a slide deck and a whole day commuting, make the pitch, answer the same irritating questions you have no good answers for, they say it looks interesting and that they'll think about it and call you, but they never call back or answer your calls. Well, some do, just to tell you something like "we need more time to think", "we want you to meet with this expert and convince him", and so on, but eventually they disappear too. Now imagine months and months of this crap...

The first time I was too inexperienced and hoped that with enough effort I can hit the jackpot (nope). The second time my partner was too inexperienced and it took me 6 months (!) to convince him to stop wasting time.

No, no more raising money for me until I have solid case for it - undeniable traction, revenues, profitability, and perfect understanding how much money I need and why exactly I need it.

On the other hand, when I reach this stage I will push for funding without second thought. After 6 months (and my constant bickering) my partner became so disheartened with his funding attempts that he jumped to the opposite extreme, i.e. "we don't need funding at all". The truth is actually in between.

Paul Jenney Compliance Manager @ TenantTracks

February 6th, 2016

Add me to the choir who thought the personal attack was baseless and as a gentlemen, tasteless.

Having said that, I have the same questions Michelle does except I know approximately where we are (nothing but an idea) and a schematic on how to get our first paying customer.

We're going to be in the pet services field but my idea goes a bit into the Uber style app territory and is a bit of a revolution for the space. I have a business plan, the support of two bankers and my attorney, and a gentlemen who works in the venture mentoring space.

So my idea seems solid, and I can get the services part of the ground by myself. I have the labor built into my charity (the company is a financial vehicle for the charity to prosper) but the app is beyond me as is scaling up the company to regional based or god-forbid (or wow, thank you Lord) nationally.

So I am looking for some startup money and a partner perhaps...but mostly advice. I may look into crowdfunding as a way to fund the app and the initial launch to see how it proves out.

David Pariseau

February 6th, 2016

I'm in a similar position with one of my companies. We've funded everything out-of-pocket to date and it's been challenging. Along the way we've considered outside funding. Of course with deep pockets there are so many things we could do, so many holes we could fill, resources we could add. But, in a way having limited resources is a blessing. There's never a huge dilemma about where to use incoming funds since it's usually obvious. It keeps us lean and focused on immediate priorities, and we find ways to make do with what we have. Sometimes a bunch of money and outside suggestions eases that daily pressure that keeps you focused. You can start getting side-tracked by all kinds of things you never had the funds to consider before. And, though some of these projects can yield benefits many of these are just distractions from the bottom line. Not to mention that something also happens in the dynamics in the company. People who realized that funds were tight made do, but now that there are funds, folks can start thinking that we should all have new chairs, new carpets, oh and did you see those neat new ergonomic desks...

ernest capobianco CEO/ Rocco University

February 7th, 2016

Great question Michelle - Many people have great ideas for a product or service, they just need seed money to get it started. Fair enough.

The question to ask is why would anyone invest in my idea? Now, unless you have family friends who want to give you a gift, which personally, I would never do because of the often negative consequences associated with that. Let your family relationships stand apart from your money-making ideas; you will be much happier and have way less stress in your life.

Now, back to the question. Why would anyone invest? The only reason (aside from family/friends love and support) is to make MORE money.

How do you illustrate that your idea will generate returns; because investors want to know how you will reduce the risks associated with your start up.

The best way to show reduced risk is to show a track record of sales and profits over a period of time. Absent that track record, you need to show that there is demand for your product/service. Maybe a prototype that has been used by potential customers with their feedback. Or maybe you performed a test market on a smaller scale that shows incredible sales potential. You need to show that a lot of folks want what you have and that you are different than your competition.

The other things to consider are to illustrate what you are going to do with the money. I've been approached by start ups for cash only to find out that they need the cash to help fund their living expenses (salary, food, rent, etc) while they are working on their idea. Wow. Really? In this case, a family gift is the way to go - which i would never do.

Lastly, you need to illustrate a solid exit strategy. Are you going to go public once you reach critical mass? Will you position yourself to be sold to a larger company? Will you repurchase their stock with a guaranteed return? If that is the case, you need to know the sales multiples of EBITDAwith projections.

And of course, part of all this is your survey and understanding of the competitive landscape and your ability to stay uniquely positioned so as to avoid sales erosion.

Yes, lots to consider and daunting when you view this however it can be real simple.

If you believe you have a great idea and no capital, your idea needs to carry its own weight while generating some amount of market interest that you can quantify or better yet, generate cash. Because the most important thing with investors is this - they've made their money usually by being very smart and taking risks themselves.

The last thing they will do is to give their money away when they perceive a risk much greater than the stock market with returns that haven't clearly been illustrated.

Thomas Kaled Business Development Consultant @ thomas.kaled@gmail.com

February 7th, 2016

This is a wonderful string, rich in opinions, ideas' thoughts and experiences. I've enjoyed it immensely.

I've founded and owned companies public, private with investors and private without. Cash is but one of the bolts in the quiver of an entrepreneur as is the product (or service), sales and senior team all of which are invaluable if one is to 'take down' a market. It is conceivable that with little cash the idea is so compelling (e.g. Facebook), or the senior team (e.g. Web MD) so capable or market penetration (sales) so dominant (e.g. AOL) that cash is not as key to the development however at some point without it the product (e.g. Netscape) will be admirable but become an obscurity and eventually join the junkpile of great ideas that didn't 'make the distance'...I however am wandering from your question(s).

I used cash to help move expeditiously to consolidate a market via acquisition, to gain a return for angel, 2nd and third tier as well as public investors and to acquire capital equipment that maintained a venture's preeminence as a 'bleeding' edge service provider.

My regret and in answer to your last 3 questions is that in one of the ventures I did not move quickly enough to 'shop' a deal, the market cooled down and I was left with a marginally profitable company that was at best maintaining market share in the short run but was bound to lose as newer market entrants had more extemporaneous superior technology. In summary my regret was not timing capital to market conditions hence placing the life of the corporation in jeopardy...failing my prime responsibility as a CEO. Capital is not the only arrow available to the entrepreneur but when required know when to nock it and release is key to your and your teams survival.

Hopefully you'll tolerate the metaphor Michelle and glean something from the rhetoric that surrounds it.