In order to figure out what funding plan works best for you, let’s take a look at your goals, your time frame, and your resources. All of these are important aspects in assessing your funding style.
What are your goals?
“If we could first know where we are, and whither we are tending, we could better judge what to do, and how to do it,” said Abraham Lincoln in 1858, and he’s not far off when it comes to startups.
We’re going to take some time now to emphasize that you cannot devise an optimal funding strategy until you know where you’re starting from and what you’re trying to accomplish. Taking a serious, sober look at your goals is a vitally important part of getting funded. Whether you are starting Fitbit for Dogs or a hot dog cart or the first company to mine gold from asteroids, your ultimate goal should be to grow outside of your little corner of the globe and expand. Some businesses —restaurants or shops, for example— don’t necessarily want to leave their neighborhoods. In that case they will want to bring the globe to them through an attention to detail and a focus on excellence.
We may sound fairly mercenary in saying that businesses are all about making money. But we say this because we’ve seen far too many ideas die on the vine because the creators were thinking too much about their passion and their desire to share their creation with the world and thinking too little about building a business. To create and lead a successful startup, you have to love what you do. When you take stock of your starting resources, you will notice that most of them relate to your doing something you love. You didn’t go into cooking or art or robotics because you thought you’d make the big bucks. You built your career because you felt a deep and abiding passion for those things. But passion is not enough. You first need to know, in Lincoln’s words, where you are, and whither you are tending.
So let’s talk about your goals.
Why are you building this business? Do you want to create a lasting institution that you can pass on to your children? Do you have an amazing idea that you can commercialize? Do you believe strongly that your idea can change the world—or maybe just your corner of it? In defining your goals, we encourage you to think in broad, world-straddling ways. Instead of saying “I want to open a restaurant,” describe your dream. Describe what the world looks like after you’re done:
“We hope to create a cozy, hometown hot dog spot for families and teens that thrives and grows over 50 years.”
Or:
“We want to build the world’s best dating site for people who have a hard time approaching people in real life.”
Or:
“We want to create a method to 3D print metals without expensive heating elements and pollution-causing chemicals.”
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This is your opportunity to use the language of entrepreneurship to define what you want to accomplish. You know all those Facebook posts that feature a beautiful sunrise and “Waking up to take on the world” written underneath? Those pieces of entrepreneurial theater are silly but vitally necessary. An entrepreneur’s day is a roller coaster, ranging from utter despair to absolute joy. Having a clear goal in mind every morning is the best thing you can do for yourself and your business. Some goals are big: “To build the premier speaking bureau on the East Coast.” Some goals are small: “To make it through the day without wanting to cry.” The best way to avoid despair is to remind yourself of your goals daily.
Your primary goal is called your Big, Hairy Audacious Goal— your BHAG. It is your driving force and should be behind your every move. Make a banner featuring your BHAG. Tattoo it on your wrist. Skywrite it over your office. Just don’t forget it. Your BHAG is your end zone, and it should always be top of mind. But don’t let it overtake all of your subgoals.
Everything else is subservient to this BHAG. The unfortunate thing is that in the midst of building your business, you may become so overwhelmed with daily crises that you lose sight of your BHAG. That’s why it’s imperative that you keep it close at hand. It is what will get you through the tough times when the next paycheck is months away. And, alas, sometimes a serious consultation with your BHAG will help you realize that it’s time to pack things up.
The roller coaster
As you define your goal, you must create subgoals. A subgoal will be familiar to you if you’ve been in a corporate setting, and sometimes it is called a key performance indicator (KPI): “a measurable value that demonstrates how effectively a company is achieving key business objectives.” You can call subgoals whatever you want in your business; just make sure you write them out. Imagine a new startup. You need to market your product to 100,000 to get 1,000 orders. You need to cold-call 100 times. You need 10 customers to keep the lights on. Be brutal.
Grab your whiteboard and your cofounders, and write down your goals. If it’s just you, then you should pour a cold glass of wine or seltzer and figure out what you, as a solo founder, can do. Here’s a sample goal sheet.
The list should include your BHAG and a set of subgoals. Write them down on a whiteboard or poster board, and consult them when you get lost.
Here are two examples:
BHAG: Create the best hot dog restaurant in the world.
Subgoals
- Find and support the best local suppliers of meat, bread, and condiments.
- Make people smile every day.
- Create an amazing place people want to visit daily.
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BHAG: Make and sell pizzas using robots.
Subgoals
- Create a method for robotically preparing pizzas.
- Create a distribution model.
- Build a business that does good and does well.
- Give back to the local community.
- Teach employees how to operate pizza robots and serve customers.
Here’s a general template for your BHAG and subgoal formulation:
BHAG: Our startup wants to change the world using our unique advantage over our competitors.
Subgoals
- Raise US$1 million to roll out European arm of the company.
- Market to 1,000 potential customers through lead generation.
- Sell 100 products per month to maintain cash flow.
- And so on.
Pick about five goals or fewer. Anything more will overwhelm you.
Now, decide what you need to complete these goals. The first goal requires macrofunding and extensive pitching. The second goal doesn’t require any funding at all and involves bootstrapping and sweat equity. Then the third goal might require crowdfunding a product and then selling it on the crowdfunding platform. Some of these subgoals require your full attention. Some require only a few hours a day.
Take our original list. Here are the fundraising options for each goal, now in order of attainability:
BHAG: Our startup wants to change the world using our unique advantage over our competitors.
Subgoals
- Market to 1,000 potential customers through lead generation —boostrapping/accelerator
- Sell 100 products per month to maintain cash flow —crowdfunding
- Raise US$1 million to roll out European arm of the company —VC raise
As you work on these goals, you’ll experience the entrepreneurial roller coaster. If you attack the third subgoal —raise US$1 million— you’ll find yourself in endless meetings with investors, and if you don’t have a certain amount of revenue, you might not have much of a chance. If you crowdfund and try to achieve the second goal, you might fall short one month and get lucky the next. There’s a reason the old cartoon shown in Figure 8.1 is so popular with startup founders.
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Keep your BHAG in mind as you work toward your individual goals. In the end, the methods you used to get to your end goal will fade into the background as the company grows and changes. What worked when your product was young will not work when it is older. The good news? Maybe, in the end, you might find you never even need to fundraise at all.
As Joshua, the sentient computer in WarGames once said, “A strange game. The only winning move is not to play.”
What is your time frame?
Timing is everything when it comes to early, innovative startups. Start too soon and you’ll burn cash before you can make a profit. Start too late and you’ll find endless hordes of competitors who entered the Golidlocks zone of “just-right growth.”
Further, your time frame matters in the physical world. If you’re starting a hot dog stand in a temperate zone —Green Bay, Wisconsin, for example— then surely you’ll want to be operational by the time the nice weather arrives in mid- to late spring. If you’re just starting the funding process in late February, then you’re already behind the eight ball, and speed becomes a driving consideration. If, on the other hand, you’re starting up a company to mine gold on asteroids, a few weeks’ or months’ delay won’t matter. Your time frame is years, maybe decades. Most startups fall in between these extremes. You will need a preliminary road map for at least the first two years of your business, not just for your own internal gyroscope but to explain your plan to investors. Further, you’ll need some sort of moneymaking prospect in order to stay in business and be ready for the moment you actually touch down on an asteroid.
Create a list of time blockers, as shown in Table 8.1. Each one of these will keep you from moving forward if you can’t find the cash for them. If you can’t feed your family, you can’t continue. Don’t quit your job until you have cash coming in, or you’ll bump up against this blocker. Assess the easiest funding method—including bootstrapping and a friends-and-family-round to solve this. Need to hire a programmer? Dip into your savings, bootstrap, and keep working your nine-to-five job while your developer works. At each stage, assess the funding type you might need.
We wish we could say that there will be a time when you won’t have to think about these blockers, but startups are full of implied time limits. In many cases joining an accelerator can give you a solid year of growth before you have to generate revenue. Further, you should also remember that investors are generally amenable to the founders’ paying themselves between US$5,000 and US$8,000 a month out of their early funding, especially if it means the difference between shutting down and continuing. You should always discuss this with your investors, however, as many investors prefer to pay for actual development and not marketing, sales, or other non-developmental salaries—including executive cash.
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That said, if you can’t survive on savings, then many blockers can be canceled out by the need to work a day job. In this case you’ll want to raise F&F cash and bootstrap because no investor—angel or otherwise—will ever invest in a founder who is still working a full-time job.
Take a look at the ideal fundraising methods to avoid each of these blockers. Keep in mind that you can fundraise to build a business —there is nothing that says you have to ship a physical product. That said, you should offer your backers something, or you should consider equity crowdfunding— that is, the process of selling parts of your company to many individual backers for small amounts of money (Table 8.2).
This in turn brings up another important point: make sure your investors know your timeline, and make sure they are available to help you complete it. Investors shouldn’t just want to write checks unless you are raising Series A funding or beyond. Instead, use your investors as an engine toward success. Ask them to help you raise further rounds. Ask for their support in crowdfunding efforts. And ask them to support you in the non-developmental aspects of your business so you can focus on the more important process of product creation. If they are unable to help, don’t get frustrated, but in the future find better investors.
What resources do you have?
Once you understand your goals and your time limits, it’s time to understand your resources. The best way to think about these resources is through the lens of opportunity costs. What will you gain from building a business? What will you lose? Should you quit your job? Should you try multiple startups at once? Should you quit all other projects to focus on one?
You need to address the opportunity cost associated with deciding to build this business. Will doing this preclude doing something more lucrative? Then you will need to price your product high enough to match your current monetary needs. There is no shame in living on ramen in a shared house, but most entrepreneurs would prefer to sip the occasional latte. When it comes to business, suffering for your art is silly. Just because countless college dropouts claim to have done it (and most of them didn’t really do it) doesn’t make it a badge of pride. Further, if your business will not eventually make you more money than you make now, then it’s probably not worth starting. Barring a creator with a passion project and independent wealth, a startup that does not soon supply you with monetary gain is a hobby, not a business.
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We will say this again and again: the best businesses take off immediately. This means you will have a client on day 1 whether that client is buying your product or services. When I (John) founded a company called Freemit, we had plenty of interest, but nobody who wanted to use the service Freemit offered. Freemit didn’t have a finished product to sell, but it did have a very basic formula for making money on day 1. It also had a few potential customers who thought they understood the idea and asked to use the service to move some money. Freemit could have been a nice B2B business if we had taken that route, and that service-based business could have helped finance the product-based company we were trying to launch. But many obstacles, including government regulations and limitations in blockchain technology, kept preventing us from making that first dollar. When your product is unable to launch, you’re pretty much sunk. Although we didn’t recognize it at the time, that inability to make the first dollar was a screaming neon warning sign telling us that something was wrong with our model.
Sure, there are startups that have a difficult time making that first dollar. Our hypothetical asteroid-mining company falls into that category. But most often, those non-moneymaking startups are called “passion projects,” and they aren’t ready for public consumption.
There is another way, however. If you haven’t taken in funding, you should use your collective skills to make money, thereby reducing the opportunity cost. Countless entrepreneurs quit their jobs, maintained a steady cash flow via consulting, and plowed that cash back into the product business until it took off. Some investors don’t like to see this on a business plan, but given that a business goal is to bring in revenue on day 1, it’s definitely something to consider.
Your resources aren’t just material. They are your fortitude, your dedication, and your drive. When entrepreneurs talk about “passion,” they don’t mean they have some deep-seated love for making a better marketing funnel. They mean they have a passion for something that isn’t a typical nine-to-five grind. Sure, there are some founders out there who want to —and will— solve world hunger. The vast majority won’t. Your internal drive to escape the day-to-day drudgery of a corporate job is your biggest and most important resource, and everything you do —from your fundraising to defining your BHAG to your first sale— should be focused on forward momentum.
How much are you worth?
Once you have defined your business, you can move to pricing. Pricing and selling a product are the ultimate forms of fundraising, whether that product is a box of cereal like the Airbnb crew’s cereal or it’s your services as a consultant. Pricing your products requires a bit of guesswork and a deep understanding of your market . . . and even then, you’ll be wrong. That said, you will want to consider all aspects of your product as you decide on pricing.
Your variables include these:
- Staff costs
- Rent
- Product costs or bill of materials
- Web server costs
- Development costs
- Marketing
- Equipment purchase or rental
- Opportunity costs
- Taxes and fees
As you can see in Table 8.3, we assume a great deal of capital spending upfront —say, US$40,000 for hardware and software development— and slow growth in staff.
When investors ask for a “business plan” or cost estimates, your costs document that resembles Table 8.3 is what they are looking for. In fact, we recommend attaching this document to your follow-up e-mails to investors who have expressed interest in your business. Many founders include it in their decks as well, although we recommend adding it as a separate document so you can update it as necessary.
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Price your product so that you can make money. Pricing yourself too low or giving away your product is never a way to win, and, increasingly, investors will not write checks for companies that have no revenue. The first rule of a business is to make money. Ignore it at your peril.
There are exceptions to this including businesses that depend primarily on virality. For example, if you create a popular app, a competitor might want to buy it in order to fold your customers into their solution. In this case, some investors might be willing to invest in your progress, but you should understand their motives: they probably already have a buyer lined up for your app. That said, current funding models rarely reward companies without revenue although, as we’ve said again and again, your results may vary.
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This is an excerpt from the book Get Funded! by Eric Villines and John Biggs. You can buy it on Amazon here.
Image Credit: Charles Deluvio on Unsplash
The post Book Excerpt: Why successful fundraising begins with understanding your company’s needs appeared first on e27.
