How To Start Fundraising For Your New Business – Bootstrap And Venture Capital Methods
Why is it that some businesses are able to start on a shoestring and build themselves up, where others need funding from angel investors and venture capitalists? In many cases, getting investors and/or loans is not needed. It may make a business startup a little easier, but the fact is that it “can” be done without outside investors. On the other hand, some businesses need investment to get started because starting the business requires large purchases. There are also businesses where investment is needed because it takes a long time to start seeing a profit. Many technology and software companies need startup funds because it takes such a long time to go from the drawing board to having a finished product.
Starting With Almost Nothing
If you cannot start with almost nothing for startup capital (Seed Money), then you shouldn’t start up at all. There are very few businesses that need a massive injection of capital to get started. Maybe you have invented a machine that crushes cars into small pieces, you can first start by creating smaller prototypes to show investors, and maybe even building a larger (albeit primitive and ugly) version over a period of months where you add parts as your can afford them. If you need tens of thousands right away, then you are exposing yourself to a massive amount of risk with little proof of success. It is supposed to be difficult and almost impossible at first because the years you struggle are what teach you how to be successful.
Why Do People Say I Need Lots Of Money To Start My Business?
All we see on TV and on the Internet are stories about companies that started out with several millions and didn’t see a profit for six years, but they worked through that six years and now their hard work has paid off for them. The reason these stories make it on TV and on the Internet is because they are abnormal. Most companies can start and fail completely. The ones that survive will often start with very little and become profitable in less than a year. In fact, if most businesses do not become profitable very quickly, then most businesses die off. Concentrate on making money firstly. Keep the money coming in, and you can build a business from almost nothing.
About Venture Capital Financing
Before we offer a few ways to bootstrap (self-fund) your business, let us examine venture capital financing. The fact is that venture capital financing is hard to get because investors judge your business on your valuation, and the stats are not in your favor. A business valuation often relies on these factors:
[O] Proven track record
[O] Market size
[O] Company Assets
[O] Company Liabilities
[O] Perceived risk of failure
As a small or new business, your business is valued very low. Even if you have a million dollar idea, your business has a low valuation score, which means you are going to have a hard time getting venture capital money.
Venture Capital Investing In Series Or Rounds
The round/series of venture capital process is all about how big your business is. When your business starts, then “Seed” investors will arrive. When your business grows, then series A investors arrive, then B, and then C.
These are people who look at your crappy valuation and take a very big risk by giving you money to get started.
Series A Investors
These are the people who see what you are up to, who look at your (less-than-impressive) valuation, and take a chance that their investment will help you develop your company and grow your company.
Series B Investors
Now that you have a better business valuation because you have a proven track record, tested management, company assets, and so forth, you will have series B investors turning up who want to invest to make your business more competitive and stable.
Series C Investors
These investors arrive when your business is successful and highly valued, but your business looks like it can still expand and scale up. They offer money to help you scale your business and maybe go international.
Letting Venture Capitalists Get Involved
While fundraising for your new business, you may come across angel investors or venture capitalists who are more willing to invest if you let them take some of the control of the company. Many startup companies are averse to this idea because they want control of their own business, and they may have very different ideas and plans compared with the investor. However, not only is it sometimes advisable that you take the startup money, but it is also advisable that you search for people in your industry who are willing to take part in your business.
Pitching To Your Potential Investors
I would need to write a book in order to genuinely help you pitch to your investors because it is not a simple subject that can be covered by a few passages nestled in an online article. However, I need you to understand something counter-intuitive that successful venture capitalists and Angel investors know already. To put it simply:
The “Why” is more important than the “What”
Why you are doing what you are doing, and Why your service is the best, and Why your product will work, will always beat the “What” your service or product is.
A Pitch Example Using A Pitch For A Quarry Truck
What is the product?
It is 600 horsepower of monster machine that is powerful enough to pull a building down.
Why does the product exist?
Quarries need a powerful truck to shift more tonnes of rock per load.
Even though the “What” clearly has more marketing power and more impact, it is not as attractive to an investor as “Why.” The people who own the quarry may be able to see the benefit of a truck with 600 horsepower, and even if you tell your investors that “Quarry owners will want this truck,” it doesn’t have the same impact as the “Why” statement given above.
You may have the most top quality and high powered truck on the planet, and you may be able to produce them at the lowest possible price, but even those facts will not sway an investor. An investor is only interested in the “Why” when it comes to making the decision. After the decision is made, it is then when the investor truly starts thinking about the “What.” Things such as the “What” will help the investor figure out how much to give, how much to get involved, what terms to set, and so forth.
Another Pitch Example Using A Corner Shop
What is the product?
I have a small shop picked out, it is already furnished as it used to be cheese shop. The rates are cheap, and I already have a garage full of non-food stock to put in it. My chilled and fresh deliveries are reliable and very cheap. I already have $22,000 to put in, and I only need another $31,000 to finalize my setup, to make my first orders, and to advertise. This shop is almost ready to go, my profit margins are robust, and I am putting all of my personal money into it because I believe in it.
Why does the product exist?
My corner shop is going to open in order to serve a local population where the nearest convenience shop is 2 miles away, and where the nearest grocery store is 3.8 miles away. I will be the only convenience shop within 2 miles, and my 0.75 mile radius has a 2500 population density, in a low-to-moderate income area where few people have cars. I will also stay open past 7pm and up to 10pm in order to attract travelers from the main through-roads.
To an investor, the Why pitch is far more powerful than the “What” pitch, and yet the “What” pitch is clearly more attractive. The “What” pitch offers safety, it offers a clear path to success, and it demonstrates a potential for profit. However, investors prefer the “Why” pitch because investors have seen many examples where the perfect situation has led to disaster. In fact, many investors learn that the case studies they examined in college were useless in real life.
Investors invest in “Why” you do something, and they use the “What” as proof of what you believe.
Why Your College Course Was Wrong
Before pitching to your investors, consider what your college degree told you about the recipe for success. In short, it was:
- The Right People
- Enough Startup and Operating Money
- The Right Market Conditions
Your college professor probably had made you examine case study after case study that proved those three things were essential for success, but it just isn’t true. You can have all of those things and be a spectacular failure.
The TiVo Example
Take the example of TiVo. It was released and was the best product on the market, and it had been developed by the best team (the right people). It was a top quality product, and the market conditions were perfect because nobody else was allowing people to save live TV shows, pause TV shows, and skip through shows, plus it was a feature that everybody wanted because everybody hates adverts (right market conditions). Plus, the term “TiVo” took hold as a verb for recording programs, and it was featured on a variety of TV shows including the Simpsons. TiVo was also a company with a massive wedge of money behind it because investors and developers saw how TiVo would change the way we watch TV forever (enough startup and operating money). TiVo had it all, so they should have become a world leader and industry giant…right?
Yet, TiVo has been and still is a commercial failure. They have never actually made any substantial profit from their endeavor. All they have done is make enough money to keep the lights on. When TiVo (TiVo Corp) went IPO, their stock price was around $30 and it dropped down to $10 and has hovered around that price ever since.
What Did TiVo Do Wrong?
It doesn’t matter what they did wrong. The fact is that the things that people typically regards as essential for a successful business startup are incorrect…and successful investors know this. The older and more successful an investor is, then the more likely it is that he/she will ignore your comparisons with other successful companies, and more likely that he/she will disregard any talk of potential market penetration (unless you have a proven track record to back your figures up). Also, that is the sort of advice that you are not going to find elsewhere because few other writers have spent extended time with professional and successful venture capitalists…but I have, which is how I know this, and is why I know that most of the case studies you worked on in college are useless to you when you are pitching to investors.
Bootstrapping & Fundraising For Your New Business
Do not opt for a single bootstrapping method. The rest of this article on fundraising for your new business is going to concentrate on the ways you can raise some (or all) of the starting capital yourself. My advice is that you try as many of these bootstrapping methods as possible. Picking just one or two of these methods to try is a little silly when you can probably do most of them.
Work Your Full Time Job Until Your Side Project Becomes Self Sustaining
Every time I write an article about starting up for eCheck.org, I always say you should work your full-time job and run your own business on the side until it is self sustaingin. That way, you have the money from your regular job to keep your household going and to subsidize your side business until your side business starts to make enough profit for you to put yourself into it full-time. Not only does this allow you to run your business without the burden of debt, it also allows you to hone your skills, perfect your marketing, improve your service experience, and build a client list in a lower-risk environment.
Sell Some Stuff And Lower Your Standards Of Living
I have recently had an epiphany about Napoleon Hill and Think And Grow Rich to the point where I figure he was a bit of a charlatan with an easily salable idea. However, have you noticed how most of the success stories that his books mention are about people who start with nothing and work their way up to success? People who know how to live on less are often able to accumulate more. Our article about caravan salespersons shows how we crunched the numbers to figure out why people who are able to live on less are able to accumulate much more than people who need to maintain a more luxurious image (either for social or professional reasons). Lower your standards of living so that you have more liquid cash from your wages, and sell some of the stuff you can live without. Maybe you can live without your bread maker for now, and maybe you can buy the cheaper nastier bread until you have made your fortune.
Fake It Until You Make It (In Very Specific Circumstances)
The slogan “Fake It Until You Make It” is terrible advice to anybody other than a young woman who makes her breasts appear slightly larger than they are. It truly is bad advice, especially in the business world where most intelligent people will see through your act right away.
The reason it is truly terrible advice is because the fact you are small is what attracts people to you. Your story, your differences, and the fact you are not a faceless organization is the reason people are interested in you. You do not have the marketing power or influence to compete with the big companies, so why pretend to be one of them?
The only time you should fake it is when you are bootstrapping, and your “Faking it” usually involves some sort of outsourcing or dropshipping. For example, back in the days when DVDs were all the rage, a small trader set up a secondhand DVD sales website, but he only had 3000 titles in stock whereas Amazon had over 16,000. So, the sales website owner decided to list thousands of the titles he saw on Amazon on his website, and when people bought from him, he would drop-ship them from the cheapest Amazon seller. His drop-shipping technique didn’t make him much profit, but the technique he used made his online store look far bigger and more successful, so people kept coming back to look for deals. He used to offer bundle deals on his website, which is something that Amazon didn’t offer, which is why he built up a steady flow of customers.
Credit Cards And Overdrafts
Go to your bank and ask for $3000 to start a business, and they will show you the door unless you have $9000 in collateral, or unless your business has been running for years. However, if you apply online for a personal overdraft on your regular bank account, then your bank will probably say yes if you have an average (or more) credit rating. Credit cards are even easier to get because you can get plenty of sucky (but reputable) credit cards with a poor credit rating. Even if you cannot find a credit card that has a $3000 credit limit, you can probably find two that have a $1800 (or $1200) credit limit on each. Am I suggesting that you get into credit card debt? No, but it is an option, and it is a reasonable option if you run your business on the side and use your day-job (regular job) wages to repay the credit cards. It is not ideal, but it is a fairly low-risk and low-impact way to get a small business started.
Go To Your Bank…But Not For A Business Loan
As mentioned in the previous section, you shouldn’t go to your bank for a business credit card or business loan unless you have a lot of collateral, and/or unless your business has a very good credit rating. However, if you have a very good personal credit rating, you could always get a personal loan and use it to start your business. This is technically against the terms and conditions of your loan, but it is an option. You could say that the loan is for refurbishing your garage, without mentioning that you are refurbishing it into a new car painting shop. It is not as if your bank are going to come out to your house to check to see how you used your loan.
The idea of crowdfunding is not as popular as it was because many people have been screwed out of their money. It went from an inspirational marketplace where dreams could become a reality, to a place where people beg for money with no consequences on receipt. The gaming portal Steam is loaded with terrible and half-finished games that were funded for millions and where the developers did a sketchy rush job, published it on Steam, and did a runner with the money. Despite the fact that people are wising up to being ripped off by crowdfunding, there is a way you can use it. For example, if you have a business where you are building a small following of fans. Maybe you wish to turn your part-time business into a full-time business, but you need a certain amount of money for a piece of equipment. You can invite your fans to offer donations via a crowdfunding platform, and you can encourage your fans to draw other donators in. Ask your fans for help, and they may power part of your fundraising efforts themselves. Kickstarter, AngelList and Wefunde are currently three of the most popular crowdfunding platforms.
Asking Friends And Family
Be aware that you will have to fall out with your friends and family once you borrow money from them because you will begin to resent that person as soon as you have spent the money they have sent you. Watch a few episodes of Judge Judy and you will see how the person who lends the money is always the one who is hated by the borrower. If you are asking your friends and family for money, then ask for a small subsidy rather than a lump sum. For example, do not ask each family member for $520, you ask each family member to set up a $10 per week direct debit from their account to your account, and ask them to keep it running up until your business is self sustaining, at which point they can stop the payments and you will reverse the payments and pay them $10 per week until it is paid off. Asking for a small amount over a series of months is far easier than asking a large and immediate loan.
If any part of your new business venture is creative, then you need to get your ass on Patreon. It has a reciprocative social media feel about it that allows donators to feel as if they are making a difference and getting something for their money. Maybe you are creating app, music, online tools, videos, games or whatever, if part of your service/product is creative where you may have fans of your work, then Patreon is the one for you. The producer/business gets to see who donates and how much each person donates. Plus, the donator may choose the donate once, monthly, or whenever the producer/business produces something new. The business/producer may offer rewards for donators such as behind-the-scenes views, free test products, and so forth.
Sell Something Big
There are plenty of inspirational stories out there where somebody sold their car and started a business, or who cashed in their pension (or life insurance) with big deductions, and then started a successful business. Obviously, trying something like this is a big decision, and it is a pretty ugly option, but it is an option. It is one of the many things you may try in order to get your business off the ground. Do not forget that it is often easier to get venture capitalists and/or angel investors to trust you if you have a proven track record. Start your business slowly and carefully, and build it slowly until it reaches a profitable point where investors will feel more at ease when lending you their money.