What's the value of something as yet unproven?
Before I set up my own business, I didn't know much about the funding side of things. I had no clear understanding of how investor modelling works for a brand new business with no track record or market position. I wasn't even sure who to approach to help explain it to me.
I set out to find some really good resources and a few patient experts to explain to me what I really needed to know. And what I learned was not just enlightening, it was really empowering.
If I hadn't taken this approach, I would have made different decisions about how and when to fund my business. Those decisions probably would have tripped me up later on.
Originally, I was going to produce my own blog on my learnings, but actually, all you really need to know at the outset is far more beautifully illustrated in the linked infographical article.
Once you've enjoyed reading that article, take a look at this complementary piece by Mark Suster for Both Sides entitled ‘Why raising too much moneycan harm your startup’.
Between them, these materials provide an excellent grounding for anyone embarking on this journey for the first time.
Amongst all the learnings that I made, 2 great pieces of advice really stood out for me:
1.) Resist the temptation to be too grateful:
It is wonderful when someone tells you that they believe in your idea and/or wants to be involved in some way, either as a fellow contributor or as an advisor. This is especially the case in the beginning, when you experience those all too inevitable moments of self-doubt and anxiety about the challenges and risks that lie ahead of you.
But it's really important not to give away too much equity in the early days.
Where you do give someone a slice of your new business pie, make sure that you are getting something of real and immediately relevant value back. That value might be essential skills or expert knowledge to get you to market. It might be critical money that you really can't manage without.
On each occasion though, thoroughly consider what is being offered to you and whether it is critical right now.
For example, let's say you're contemplating bringing someone on to help you develop your business. If that help is critical right now, ask yourself whether you can afford to pay a reasonable market price for it? If you can, then don't feel the pressure to give away equity at this stage. You're already giving a fair value in return for the help provided.
In the above scenario, it's best to reserve the early equity stakes for those you really do need, but whom you can't afford to pay a market rate. These are often your most precious startup resources. They are the rare and generous few who believe in your vision, who are willing to take a risk and an uncompetitive wage, but who need to know that their sacrifice and investment will pay off when success arrives.
Be prudent, be very objective, don't make it personal and never 'romanticise' when it comes to sharing future financial benefits long before they've been realised.
2.) It's better to 'bootstrap' at the outset
If you can afford to do so, self-fund at the beginning of your new venture.
Several of the expert investors with whom I spoke and asked for guidance instantly advised this. It was advice that was echoed by a number of successful founders and CEO's in my network: if you already know how to build your product or business proposition; if you know how to get it to market and you can manage supply and distribution; if you can build the right relationships and generate the right levels of awareness, then self-fund and/or reach out to friends and family to support your initial stages.
If you can do this, you do not need the 'big guns' until you're ready to scale up. It is best, meanwhile, to keep control of what you're creating and pedal as fast as you reasonably can to get your business making money.
Then when you're ready to scale and take it up a gear, that's a great time to start considering diluting your control in return for money, ideally from investors who can also offer you valuable advisory support that will take you to the next stage.
The value of early stage guidance
That's not to say that validating your proposition at an early stage with experienced investors is not worthwhile. Having a 'friendly' view from someone experienced in reviewing startup businesses, who can help you to value your business in the early days and to decide what you might want to offer to e.g. co-founders or friendly 'angel' investors, can be hugely beneficial. When you have these discussions without the pressure of an investment ask behind them, it's amazing what you can learn and how constructive the experts are willing to be.
For my part, it has meant that I've been able to stride ahead with the confidence that there is real investor enthusiasm for what I'm creating, that we're handling things the right way, and crucially, that when we are ready to scale up, there's likely to be a number of willing sources with valuable expert guidance as well as funding available, where we can lay our investment 'ask'.
It definitely helps make the challenges of boot-strapping, prioritising and economising a lot more palatable and a little bit less scary!
I hope you find these two resources as useful as I did. They were kindly shared with me by the always generous fount of knowledge that is my friend, Yiuwin Tsang (@yiuie).
As I continue on my journey to launching a new platform for business and legal solutions, I'll continue to share our top learnings, including the advice and materials that we collect along the way. I promise not to hold back on sharing information about our mistakes as well, (since I fully expect us to make some in spite of all our best efforts!). Hopefully by sharing these blogs with you, I can help you too and with luck, prevent you from making any of the same mistakes that we do.
Do get in touch and let me know about your own experiences and any key learnings that you'd be happy to share. Our new business is all about building an empowering community where this kind of valuable advice is freely available to and shared amongst everyone who wants to be a part of it. And of course, as soon as we're up and running, I'll let you all know.
Thanks for reading.
First, let’s figure out why we are talking about funding as something you need to do. This is not a given. The opposite of funding is “bootstrapping,” the process of funding a startup through your own savings. There are a few companies that bootstrapped for a while until taking investment, like MailChimp and AirBnB.If you know the basics of how funding works, skim to the end. In this article I am giving the easiest to understand explanation of the process. Let’s start with the basics.Every time you get funding, you give up a piece of your company. The more funding you get, the more company you give up. That ‘piece of company’ is ‘equity.’ Everyone you give it to becomes a co-owner of your company.