Obtaining the necessary funds to help build a startup is a huge challenge, especially if you don’t know where to start. Many aspiring entrepreneurs have an idea for their business but lack the capital to actually start it.
Self-funding (also known as bootstrapping) It’s extremely common in a startup’s early stages for founders or team members to put their own money into the venture. In fact, professional investors have a word for it, “having skin in the game.”
Here’s why I think self-funding is the best thing a young startup can do.
1. You don’t answer to anyone
Giving up equity to an investor in exchange for cash is not a one-time transaction. A relationship is formed that will last as long as your company lasts. At the least, this will involve keeping investors in the loop about your progress and major business decisions. At the worst, this will involve more business overhead (meetings, futzing around in excel, getting sign off before you buy things), potential micromanagement or having to constantly justify your actions.
In other words it can be a lot like having a boss again. If you became an entrepreneur to be your own boss, raising large amounts of funding effectively puts an end to that.
2. You are free to grow organically
If you’re doing what you love, your company is paying all the bills, growing nicely and has lots of fanatical customers you’re doing pretty well right? Wrong. If you’ve taken funding your investors will want to see exponential growth. Your company growing “nicely” will not deliver them the return that their limited partners expect. In the worst case scenario even if your numbers are respectable for any normal business, your investors will encourage you to figure out a model with higher growth/risk even if that means changing what is currently working well for you.
For a certain size of investor it is preferable that you either get massive or just fail and disappear – the middle ground doesn’t move the needle for them.
3. You’re in good company
Bootstrappers tend to gravitate towards other bootstrappers. This will reveal a previously invisible subculture of folks running successful businesses, killing it, and just enjoying life. No media circus, no questionable value propositions, no mysteries as to how they make money (they have customers who pay them) – just a group of people who found a market niche and are delivering value in that niche.
4. You are forced to focus on revenue
You don’t have a fat chunk of funding in the company bank account providing a year or more of runway. You only have a meager personal cash injection from your own savings, giving maybe 6 months of runway if you forgo luxuries such as eating.
There is nothing quite like the fear of going flat broke to give you a kick up the backside to start generating revenue. In the context of startups this means you throw away any idea that doesn’t make money from day 1. No “aiming for user growth first”. No “figuring out the revenue model later”. You are forced to build something valuable, something worth paying for right now. For 99.9% of businesses in the known world, that’s fundamentally how they function and that’s what you should be aiming for too.
5. You don’t waste time raising funding
Fundraising is a dangerous time suck for early stage startups. I’ve watched many startups get so consumed with meeting investors or preparing for interviews with accelerators that they lose focus on their product and customers. Every minute you spend talking to investors is a minute that you could be improving your product and delighting your customers. Realistically you’ll need 50 meetings to get interest from 5 investors, which will result in 1 term sheet. If you’re an early stage startup that has barely made its first dollar, I can’t think of a more epic waste of time.
6.You learn the value of money faster
When you don’t have a chunk of funding sitting in the bank account, you spend money more frugally. In general I think this is a positive trait to cultivate as an entrepreneur. The opposite is extremely detrimental; frivolous spending on fancy office space / furniture / toys etc. Not all funded startups are guilty of this of course, but funding does enable this behavior.
7. Early stage investing is rife with dubious characters
Be wary of any accelerator whose only real business creds are that they have built an accelerator. Although some good accelerators exist, my opinion of many is that they are a meta-startup whose customer is you, the startup entrepreneur. You don’t need an accelerator to get a cash injection of $20k for 20% ownership. For small amounts of cash like that, just get off your ass, do some consulting and keep your equity.
Mentorship is the much more opaque benefit, but again – a good mentor doesn’t need to come via an organized programme. You can proactively find your own mentors.
8. You work on something that truly interests you
With funded startups often founders get into business purely because there’s a big opportunity. Some growing market in need of a solution. Or perhaps a model is copied from a successful startup in a foreign market, and executed in a home market. Personally I can’t imagine working on a problem that I am less than fanatical about solving. I can’t imagine coming into work every day trying to solve a problem that is alien to me just because of a potential pot of gold waiting somewhere. That’s not why I’m running a business.
When you self-fund you are on a crusade. You’re working on something because you believe in it to the point where you’re willing to take on personal risk.
9. You increase your leverage for future fundraising
They say the best conditions to raise funding are when you don’t need it. If investors want to invest in your company when you’re bootstrapped, profitable and growing – you have all the leverage. You can name your terms and walk away from the deal if you aren’t happy. There will be other interested investors.
You see, bootstrapping your early stage startup doesn’t preclude the possibility of you raising funding in the future. For example after having validated a market and grown to your first 1000 customers, perhaps you’ll want to accelerate growth and raise funding to grow to 100,000 customers. That’s a path many bootstrapped companies have taken. Your conversations and resultant deal terms are going to be significantly better having bootstrapped to 1000 customers, than running round town having investor meetings with 0 customers to your name.
Funding your startup with your own money is the way to go. It is the only real way to maintain control in the early stage of the company and determine the future.