Funding: a quick answer
Founders and small business owners request funding for many different reasons. In many cases, they have done their due diligence and have proven a product/market fit.
Many people want to get funding, as this takes the liability off themselves and onto the funder. For others, they would like to scale their company to make more money.
Though there is not a one size fits all, it is worth exploring all avenues before going the funding route.
What other options do I have before I get funding?
The other day I spoke to a lady that asked me for a small loan. She needed R 5 000 to get her business off the ground. I decided to rather take the route of asking questions on how to bootstrap her business. It came out that she wanted to buy stock and wasn’t willing to start small. This was quite alarming for me, as many people want to do a big reveal of a product/service.
Bootstrapping allows us to learn – what do my customers want? How do they want it? How can I satisfy their needs? We know from success stories such as Netflix and Airbnb that learning is essential to success – and pivoting where needs are.
A company of one
Our culture is obsessed with “Bigger is better”. For this reason, Paul Jarvis wrote in his book “Company of One” that we should consider staying small and not scale for the sake of scaling. Explaining that large businesses have more overheads such as an HR department, legal and change management, he noted that his business was able to survive through recessions and bad times.
While staying small might not be the goal, it should be considered building relationships with customers, automating anything that is eating away at your time and optimising the business process.
Pre-selling your product or services
In some cases, you need money to grow. It is an option to test the viability and raise capital by pre-selling your products. There are multiple online platforms that you can sell your products, including Indiegogo, Kickstarter and GoFundMe.
On the other side, many software people sell products even before they are developed. Giving the customer HTML/CSS mockups, and/or working with the clients to develop the solution might bring cash flow to a business.
Minimum viable products (MVP)
For a startup, it is vital to get your first paying customer. With an MVP, you have something to show potential clients and start the learning cycle.
The biggest issue today with entrepreneurship and code is not building products inefficiently. It is building products nobody wants very efficiently.
Breaking down requirements can point the founders to what is important to customers. This could cause the MVP to become the product, eliminating the necessity for funding, which would only be required for scaling at a later stage.
What should happen before seeking funding?
At some point, a business might require funding. As the goal of a startup is to find a product/market fit and then scale aggressively, it makes sense that funding will be sought as soon as the tipping point is reached.
In some cases, such as accelerator programmes, the money will be given upfront, with guidance and mentoring. With most of the startups in South Africa, the scarcity of funding options requires a certain level of innovation and certainty that the offering will deliver on promises of profit, value and expectations.
The European Innovation Academy identified steps before raising capital. Though these steps are not cast in stone, it is interesting to consider how much needs to happen before getting venture capitalists (VCs) or other funders involved.
In my experience, startups try to get funding before proper validation (both product/market fit and market research) has been done.
Though I am not oblivious to the fact that sometimes economies of scale will determine the profitability, it is recommended to keep the business out of the hands of strangers as long as you can, as funders will invest in the perceived value of the company.
Management and expectations from investors
Venture capitalists (VCs), Angel investors and other sources of funding will indirectly become your boss when you get funding. According to Jose Cayasso (CEO of Slidebean), investors are looking for exponential growth on their seed investment – not just a 10% or 100% return.
The investors will become your boss – and the aim will be to scale the business as quickly as possible so that they can get a return on investment to the investors they represent.
As the founder, if you need to work fulltime with the startup, there will be no room for a retirement fund or luxuries. Your salary will be absolutely basic necessities. You will need to negotiate hard with your funders to justify why you need the money you need.
Do you really need funding?
Though this question is dependent on many factors, a few pointers should be considered before funding is pursued:
- Has the research been done and shows a market fit?
- Were all options for pre-selling, MVPs and bootstrapping considered?
- What type of returns will the potential investors be looking at? Is this sizable compared to the seed investment?
Though there is no right answer concerning if you need funding, it is worth noting that we shouldn’t ask for money too fast.
There is no such thing as a free lunch.
Consider all the options outside of funding first. Use funding to scale a startup, rather than fund development. Is it possible to fund development through investors? Yes. Yet, it is an expensive test to see if it would work.
Simply be effective.