Founders face many challenges at the infancy of their start-up journey, with a fundamental one being the big question of funding.
We understand that early days of a start-up are periods of turbulence and volatility. It can often feel like there are more challenges than there are wins. Some failures can prove especially costly and cash flows can turn into a stressor more than anything else.
This period may prove difficult to navigate, more so when the start-up enters the infamous ‘valley of death’, which is a phase in the start-up world where the company has commenced operations, but is yet to make any money. Although this may be a risky period for start-ups, it is also a test of the founders’ resilience.
At this point, the start-up may have found product-market fit and launched its minimum viable product. But even as its product sees market acceptance, it has not yet started generating revenues, and so, its cash burnout rate will increase until the business, and not just the product, sees success.
The founders will be able to navigate these turbulent times by ensuring there are available funds to get through this period, and the route to ensure this is neither simple, nor straightforward. The reason I say this is due to my belief that every business is unique and every idea requires different level of technical knowledge, product knowledge and market knowledge as well as capital requirements. While some start-ups are less capital intensive than others are, this also depends on the sector the founder is trying to disrupt. Regardless of the decision, if I have one recommendation, it is to “never give up controlling interest at the early stage of your start-up”, at least not until you are at the stage where you need the capital to penetrate the market and avoid missing the opportunity. Even then, it should not be a decision taken lightly as it will affect the ability for the business to raise more funds in the next rounds.
The benefits of having enough cash reserve are numerous, including the ability to obtain the necessary operational resources, increase financial stability, and quickly accelerate growth in order to capitalise on market opportunities and one way to achieve this is by partnering with an investor. I would go as far as saying that the right investor is likely to give entrepreneurs a huge support by allowing them access to their network as well as providing financial and operation support.
However, seeking out an investor is not always the right approach to funding a start-up, specifically at the earliest stages. It is widely known that founders bootstrapped the likes of Nike, Microsoft and Alibaba for years before they sought venture capital investment. This enabled them to focus on the long-term prospects of the business, and be efficient in spending money not busy with spending money.
Bootstrapping is when founders use their own funds to get their businesses through the early stage without external funding, which with the right execution and management allows the founders to reap rewards beyond financial, that are, more often than not, exclusive to bootstrapped companies. Not to mention that investors in future rounds will look favourably at start-ups with capital efficiency and those that were able to get through the valley of death, especially those that retained significant control up to the point of fund raising.
According to our research and experience, the following are some of the main benefits of going the bootstrapping route instead of external investment (Angel or VC investors).
Maintain culture and values
It’s inspiring how many businesses were started by founders who could have produced the same idea under an established business, but instead chose to start a new business to build one with a culture they believe in. maintaining that culture becomes a little more challenging when other decision makers join the table and the culture may start to deviate at its infancy from the vision of the founders. By delaying the process of external fund raising until it is absolutely necessary, the founder is allowing for his vision to build strength and becomes part of the identity of the start-up.
Focus on business fundamentals
Necessity is the mother of invention. This can’t be truer than in bootstrapped start-ups as it promotes efficiency in utilising resources and increases accountability by focusing on the necessary metrics that allow for controlling the bottom-line (the only controllable variable at the early stage) while targeting the necessary revenue to get through the valley of death.
Control the cost of equity
It is no secret that there is no cost greater than the cost of equity and equity value is cheapest at the early stage and increases in line with business growth and revenue.
Diluting equity (and control) is one of the most important decisions in an entrepreneur’s life cycle. Whether privately or publicly through an IPO – dilution is more or less inevitable to reach scale. The question is “when?” – don’t make the mistake of diluting too early just because the money is there and leave it to the latter stages where you really need the money but your equity is worth a lot more.
Although saying this, it does not mean that raising funds from professional investors is the wrong decision. The right investor should be aligned with your long-term goals but most importantly can provide more than just capital such as opening up resources for an entrepreneur to access the venture capital firm’s resources, including its network of connections and existing expertise. This could include access to marketing, HR, Legal service and industry expertise. This can allow for faster growth and greater success.
The conclusion is that each company has its own unique needs and to decide, the founders should ask themselves if they are open to more active input from a VC, and do they need the additional expertise and resources a VC firm could provide?
If you lack experience and could appreciate the additional support, the right VC arrangement might work for you.
Munder Shuhumi
