I’ve spent 20 years working in startups now. A few were my own, others not so much and I managed to get an exit or two along the way. In that time though the options available to entrepreneurs for funding have changed significantly, especially at the very earliest stage of a startup.
This time last year, I was sitting down to write a thesis for the Executive MBA at Cass Business School and thinking about how little consolidated information was available for entrepreneurs. Most had heard of venture capital and crowdfunding (usually Kickstarter) but of course these are not the only options. Even worse, rarely are these the best options.
So I spent six months talking to UK based entrepreneurs and investors across the spectrum to understand how each group saw things and concluded on what the best approach is for funding. Whether that is bootstrapping, friends and family, angels, accelerators, crowdfunding or diving straight into venture capital.
There is too much to cover off in one post so I am going to write a series of them looking at each in turn, the things to think about for each and then a final concluding post.
I have also embarked on another startup of my own (Masterscroll) and used the findings to help decide the approach we should take. There is nothing like being involved to highlight quirks though. So where possible I’ll include tidbits from that experience as well.
To start with, these are the 3 things that everyone should think about when raising money.
Some things apply no matter who you are.
- Not raising money is always the best option. If you can figure out a way to do it. Fund it using your customer acquisitions, use your own money to get to cashflow positive. If you are successful doing this and there is a fast growth opportunity available to you, investors will be banging on your door. Not the other way around (and that doesn’t work anyway).
- Giving away too much equity early is a bad thing. Not just because it reduces the exit for yourself, it can also have a negative effect on later rounds of funding. Venture capitalists look at how much equity will be left for the founders after their investment and if they feel it is not high enough then they will not invest as a disengaged founder is not great for a business 😉
- Raising money takes time. It takes you away from building the company. The rise of crowdfunding platforms makes raising money much more efficient than pitching to investors on a one by one basis, but you still need to invest time up front if you want to succeed.
So you shouldn’t raise money. Well life is no box of chocolates. Sometimes you need external funding to take a market quickly so that the market share itself can act as a barrier to entry. Gianvito Lanzolla, Professor of Strategy at Cass recently suggested that in each market there is typically only one major player and then a long tail of also rans. Not taking funding could mean you end up in that long tail. Maybe. Understanding what will stop other competitors from entering the market is key here. There are also still some markets that have large upfront or scaling costs such as hardware startups.
Choosing which funding approach to take once you have decided to take external funding depends very much on each startup’s situation. The upcoming posts will focus on each of the potential areas and then suggest a few of the more common approaches.