When you’re just beginning to build your startup, funding options are limited. Traditional banks won’t talk to you. VCs want to see traction and angels want to see a great MVP. Revenue-based financing isn’t an option yet, because you don’t have revenue. And on the off chance that you could get investors interested at this early stage, you’d have to give up a large chunk of equity for the financing you seek—a lot larger than you would need to when your company is larger and more financially secure.
So what are your options? The best thing you can do is bootstrap it for as long as you can. When you bootstrap your way to success, your company isn’t hampered by loan obligations as it grows, and you haven’t given up control to investors.
Here are 4 things to keep in mind as you bootstrap your way to success.
1. Pick your co-founders wisely
When you’re starting a business, the most important thing is to pick the right co-founding team. If you have somebody who you think might do, wait until you find somebody who you know is a great fit. You need people who share a similar vision and interest with you, but have complementary skill sets.
Equally important, you need to find people with the same level of commitment. Startup life is full of ups and downs and eighty-hour weeks with no compensation aren’t for the casual. Statistically, the majority of startups give up or die within four months of inception.
If you don’t have a co-founding team that can give you their full attention and commitment, it will make the journey that much harder. Your ideal team should be excited about committing to your idea and financially able to make it through the bootstrapping phase with you.
2. Don’t give up your day job just yet
Before you validate your idea and test the market, quitting your day job is risky. What if the product you envisioned just isn’t possible? What if the market isn’t interested—or if someone else has beaten you there? That’s why many of today’s entrepreneurs work on “projects” during evenings and weekends.
Even if your project shows potential to become a viable and profitable business, do the math and run some scenarios before you give notice. How long you can go without a job? Can you rely on your spouse’s income or your savings? Do you have an unexpected chunk of money (e.g. a severance package or inheritance) to get you through the pre-revenue phase?
Remember this: the cheapest money you’ll ever get is the money you earn from your day job. You don’t have to spend time chasing investors to get it, you don’t owe interest on it, and you don’t ever have to pay it back.
3. Bring in cash
At Lighter Capital, we sometimes fund companies that started out as consultants or service providers, then found a way to pivot to a product model. Steelbrick (now Salesforce Quote-to-Cash) is a good example. This kind of setup provides a quick and steady influx of cash because you get paid whenever you provide services. A smart bootstrapping strategy is to be a consultant first, generating much-needed revenue, invaluable industry experience, and a greatly expanded network. The money, experience, and network you gain will make it easier for you to productize your service down the road.
4. Control your burn
One of the reasons startups fail is that they cannot secure sufficient funding to keep growing. That means you need to gain traction before you run out of cash. If dollars in are hard to come by, you need to focus on limiting the dollars that flow out.
That is, control your burn. Keep your expenses low and make the money you have go as far as possible. For instance, don’t spend too much money scaling your business until you’ve attracted a critical mass of users who can’t live without your product. If your product needs an overhaul to appeal to your target market, the most cost-effective solution is to leverage the skills of your existing team instead of hiring outside developers. And hold off on hiring a VP of Marketing & Sales until your product is ready for primetime.
Raising capital? Find the right strategy for your startup
Most entrepreneurs see venture capital as the holy grail of funding solutions, but fewer than 1% of U.S. startups ever raise a VC round. There are other options, and they might make better sense for your business. This practical guide will help you decide what kind of capital to raise, when to raise it, and what you need to get it.