Secrets to STARTUP SUCCESS

Securing the Right Funding

One of the benefits of developing a clear math story and accurately anticipating future cash flows is getting a clear picture of your ven­ture’s capital requirements. In his classic book, Growing a Business, Paul Hawken quotes Abraham Lincoln in making a point about fund­ing. “How long should a man’s legs be?” Lincoln said, “Long enough to reach the ground.” How much money does your startup need? In Hawken’s view, you need enough money to “get to market.”9

But exactly how much money this means is not always clear, and an intense debate has risen over the past decade about the value and wisdom of raising any startup capital at all. On one side is the well - worn bootstrapper’s path, full of proud, gritty, ramen-eating stalwarts, who disdain any form of outside capital. Some proponents of this view believe that early money in the bank causes founding teams to become lazy, to become unfocused and undisciplined, and to lose touch with the market realities. Others cite the importance of retaining maximum control over the venture and one’s equity stake in it, as well as avoiding the risky burden of debt.

On the other side are investors and entrepreneurs who advocate for well-capitalized ventures, pointing to evidence that better-funded businesses succeed at higher rates.10 Over the years, I’ve heard several founders who take this view say, “I’d rather own a small slice of a something very successful than a major piece of something that fails.” Based on my experience and research, I take this view as well, believ­ing that your level of passion and preparation, as well as the market demand for your concept, are independent of how you capitalize your business. If you are capable, committed, and prepared as a founder; if you bring a healthy market orientation and have identified real market demand for your idea; and if you have planned with rigor and realism and have worked out a compelling math story, why wouldn’t you do what it takes to fully fund your plan’s success?

I do observe, on a regular basis, the dangers of unchecked spending. But spending too much money, per se, is never the real cause of new venture failure. The cause is spending it on the wrong things, which typically means overspending in some areas and underspending in oth­ers. Lynn Ivey now regrets not putting more money into upfront mar­ket development and proving that her high-end concept would fly, and she would avoid pouring upfront funds into a fixed real estate asset.

Here is a set of principles to help you think about funding your venture, whether that funding comes from personal savings or outside sources:

■ Take the long view. Work to understand the longer-term implications of your funding decisions. Too many entrepreneurs solve today’s problems in ways that limit future options. For example, raising your initial money by getting small donations from a large group of friends and family members may be the easiest approach in the short run, but you may regret it later, as more sophisticated later - stage funders often avoid deals with large groups of investors attached.

■ Understand your control needs. Few funding sources come without some loss of control. Are you willing to cede total control and build your venture under some form of investor or lender oversight?

■ Dig the well before you are thirsty. Raise money before you need it. Nothing scares away investors and lenders like an entrepreneur in financial crisis. If you have developed a clear math story, you should be able to anticipate where critical investments will be needed to get your business off the ground. Because raising capital usually takes longer than expected, wise founders are always thinking about future sources of funds and cultivating those sources.

■ Raise more money than you think you will need. New owners typically view their business through rose-colored glasses, overestimating early revenues and underestimating early costs. A general rule of thumb: Determine what you will need for a successful launch, in realistic terms, and then double it. Everything will take longer, and cost more, than you expect.

■ Realize that raising money does not equate to spending it.

You can manage your business with a bootstrapper’s mindset while maintaining access to a healthy reserve. Invest with confidence in areas of clear priority, but stay mindful of your overall expense base.

■ Consider a wide a spectrum of potential sources. Consider personal savings, financing from banks, equity investments or personal loans from friends/family, angel or venture capital investors, bootstrapping, etc., but understand the tradeoffs associated with each.

■ Understand that funding choices are highly personal. Your decisions about funding your business will be driven by your purpose, desired lifestyle, risk-tolerance, etc. There is no single “right” approach to funding your business.