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As an aspiring or current entrepreneur, you may believe that in order to create a successful company you need investor money. Perhaps not. Virgin, Dell and Microsoft all got started with no venture capital money. So did MailChimp, Shopify, WayFair, GoFundMe and Qualtrics. If you solve a problem first and figure out how to get to revenue fast, you may not need early investor money. You may decide to work with venture capitalists later to more rapidly scale or expand but you will do so at a better valuation and give up less equity.
Why not take investor money early? Because there is a potential cost to taking early money:
- Give up too much equity at an early stage: In the early days of a startup, equity is both valuable and valueless. It’s valueless because you may not have revenue and it’s hard to buy groceries or pay rent with valuation. Plus, you will need that equity for a co-founder, key employees or later stage investors.
- Begin to lose control of key decisions: When you bring on an early investor, they may believe they know more about the business than you do. While you are focused on building something meaningful and great, at some point, they want their money back. This could create real tension when you have to start running decisions past investors and they disagree with you. When the startup fails due to poor decision making, who gets blamed? You do.
- Not enough equity later for key people: Keep your equity “powder” dry. Treat your equity like it’s extremely precious. Instead of throwing equity around like its confetti, hold onto the equity until you really need to use it. The more revenue you drive, the higher your valuation and that makes your equity more valuable.
- Not focused on revenue: By taking early investor money, it may give you a false sense of security in terms of the business operations. If you take $400,000 and you have a monthly burn rate of $30,000, you have this feeling that you have a full year to make something happen. And so you take you eye off revenue. Time is a funny thing. Invariably, you will never have enough time. Develop a business model to generate revenue in the first month.
- Developing a board of investors versus advisors: How many times have you heard about a founder of a startup who was fired by the board of directors? Don’t question whether or not it was justified just understand when you build a board that is mostly made up of investors, you have not surrounded yourself with people who might care about you. They care about their money. Even if it takes longer to grow the business, surround yourself with people who will help you to succeed and not be prone to firing you. As an advisor, you might spend extra time with an amazing founder to counsel and lead them. As an investor, you would probably fire them.
Here are nine things to keep in mind if you decide to pursue a startup strategy of not seeking investor capital early in the life of the startup company:
- Get to revenue fast: Make this your mantra and goal.
- Treat equity preciously: Treat equity with a high degree of respect. Hold onto it until you really need to let some of it go.
- Bootstrap your expectations: Don’t worry about being wildly successful. Get to revenue and gain customers. Then repeat. The rest will take care of itself.
- Friends and Family debt: Use this strategy wisely. Don’t ask for more than they are willing to lose. Consider whether or not you should crowdfund versus ruining a family relationship.
- Avoid needless debt: Don’t borrow money. Keep your startup extremely lean. You don’t need an office, a desk or a warehouse.
- Hard Work: Being an entrepreneur is not sexy. Most entrepreneurs in startups work way more hours than they did when they worked for someone else. But it’s your company.
- Take advantage of opportunities: If you really look around and aim to leverage, there are a lot of resources you can leverage. Try not to spend money.
- Advisors and mentors: One of the most critical things you can do in your startup is to surround yourself with mentors and advisors who have been there and done that.
- Make tough decisions quickly: Often times, your startups failure or success will depend on your ability to make decisions in a timely manner. Don’t over analyze. Study the problem, get advice and then make a decision.
March 12, 2019 at 11:44AM
Forbes – Entrepreneurs