When it comes to funding a start-up, many entrepreneurs first look in the mirror. Many people don’t realize that only 1 percent of funding for startups comes from venture capital firms, and that 24 percent of startups find funding from friends or family and more than 80 percent are self-funded. These numbers indicate that people like having control over their business and that there is difficulty securing funds from venture capital firms.
Part of being a successful founder is knowing who to accept money from and when. Once you accept money from an investor, you’re relinquishing ownership for capital. Depending on how you want to run your new business, this can affect a lot – especially if you and your initial group of employees have a certain direction you want to take the company. Additionally, it means that every dollar you spend is questioned as to how it is moving the business forward, which is a tremendous amount of pressure. Not only is there a sacrifice of ownership and hefty accountability with venture capital firms, but it is extremely difficult to get money from them in the first place. This shouldn’t deter any businesses from seeking venture capital money, but these are truths that are often overlooked when seeking funding and why so many turn to family and friends or self-funding.
Whether you’re approaching angel investors, friends and family or venture capitalists, the fundraising process can be time-consuming. First, founders need to evaluate readiness by asking themselves if there is a legitimate need for funds. If so, then the company must ensure there is a solid business model in place, a short and long-term financial plan and a clear path to profitability. On top of this, investors need to be looked at as partners and should thoroughly understand your business – inside and out. This means founders must do due diligence on their investor portfolio and background, seeing if they have invested with potential competitors and getting to know them and their reputation – and most importantly, knowing what it means to partner with them when it comes to ownership.
All too often, there are stories about startup companies burning through millions of dollars after raising an abundance of capital. This a common pitfall for founders of startups, in that they tend to overestimate the amount of capital they need – and as a result, unnecessarily overspend thinking it will help them grow. These anecdotes beg the question on the best way for funds to be spent, especially with premature scaling being the most common reason for startups to perform worse. Founders tend to lose this battle early on by getting ahead of themselves and not being careful or strategic enough with how they spend money. In fact, according to CBI Insights, 29 percent of startups cite how they spent their money as a reason for failure.
So, if premature scaling and spending are some of the biggest factors impacting startups, wouldn’t it be advantageous for founders to take a more cautious route and spend money on the stuff that really matters to your bottom line? Yes, it definitely is. Instead of spending investor money on over-the-top office spaces or launch parties, spend it on marketing, design, product and engineering – things that will drive your business. It seems like a no-brainer, but spending money, especially someone else’s, should be done cautiously and strategically to ensure that it drives growth.
If you look at startup fundraising and spending like cooking a dish, it makes more sense – in that it takes time to build flavors and depth to make an amazing dish. You start with your base, add spices, stir, add more ingredients, simmer, stir again, taste test intermittently to make sure it’s on track and then throw it in the oven to make sure it comes out as a great finished product. On the other hand, if you mix the ingredients all at once and have the flame full blast, you’ll burn everything and ruin the meal; it just doesn’t make sense. So as to cooking, is to startup funding and spending as well. Take it slow, stir the pot, add simple ingredients, but not too much, and make sure your dish is simple enough to execute. And if you want the full dish to yourself, don’t borrow to get the ingredients.
Serial entrepreneur and startup investor, Elad Gil, who has been involved with Airbnb, Coinbase, Instacart, Pinterest, Square, Stripe and Wish once said, “There are only 3 things that kill pre-product market fit companies. These are self-evident, but founders tend to forget them. To not die you need to: 1. Find product market fit. 2. Resolve co-founder conflicts. 3. Don’t run out of money. Everything else is noise.”
These three things are of utmost importance but knowing how to not run out of money is the major key component for keeping your startup company afloat after resolving the first two. And while every founder should have an incredible passion for their idea and strongly believe they have an innovative, game-changing product on their hands, without the proper checks and balances, there will be limitations to company growth – especially if there’s no money.