Business concept: Check. Market research: Check. Funding? …oy vey.
Despite the hard work and energy you may have dedicated to your startup, all of your efforts are for naught without the proper financial backing. That means, of course, spending time creating marketing materials and pitching them to potential investors, time which could otherwise be used further developing your product. In this scenario – one which is a reality for many entrepreneurs – self-funding might seem like a viable, yet scary, option.
There are, however, a few things to consider before digging into your own pockets. Does it really make sense for your brainchild, and what does it entail?
1. You have to break eggs to make an omelet.
One of the biggest appeals of startups is becoming your own boss, but much of that sentiment loses its weight when venture capitalist firms micromanage decisions on a day-to-day basis. In this sense, self-funding becomes more appealing, but it is crucial to understand that self-funded doesn’t mean free. For some reason, many entrepreneurs tend to think that self-funded means getting almost all required parts for free (labor, ads, software, etc.), or almost free. At some point, it may be reasonable to ask a 10% discount as a self-funded, early-stage startup, but expecting everything to be free is a misconception.
When bootstrapping your own company, you have to understand that time can be a much more valuable resource in comparison to money. Money can be restored, but you can’t get your lifetime back. It’s wrong to not move forward with something very critical just because it is not free or because you are not able to get a discount.
So, if you go the self-funded route, be prepared from the start to dip into your personal savings or other assets that can be leveraged for development. Just make sure you don’t break the bank by putting all of your eggs in one basket!
2. Compensation means more than a paycheck.
While maintaining independent control of your business at the cost of the big bucks might seem worth it to you, it is less attractive to a potential hire who, in this market, has options. In the early days of a startup when pay checks aren’t as flashy as they could be, attract the talent you want with other incentives. Establish your unique company culture by building the business you have always wanted to work for. For example, when you start out, offer the benefit of working from home for yourself and your first few employees. It will not only save you on the cost of office rent, it can be a selling point to new hires, because it gives them flexibility and can save commute costs (not to mention time).
Also important when thinking about new hires is to have a clear message of what you stand for and how you express that; it will resonate with the right person for your company. You’ll need to be up front with prospective talent that you are playing the long game, and they should too. Start with a team of two or three to keep costs low, and offer them a stake, such as a co-founder title. One of these employees should be your primary product developer, and the other should have a thorough understanding of online marketing. Outsourcing has its place and can be cost effective, but especially in the case of SaaS (Software-as-a-Service) startups, in-house knowledge of the code base and being able to modify your service almost instantly is a huge advantage.
3. Have clear and measurable goals, now – there is (almost) no going back.
Because you are not beholden to a board of trustees, the only person you have to answer to is yourself, so be sure to hit the ground running with an outline of how to measure success. Five hundred customers in the first six months? Two new hires in the first year? Whatever metric makes the most sense, use it as your bedrock. Set milestones so if you’re not measuring up to expectations, you can adjust your business practices accordingly.
Outside of your standard business goals, it is vital to determine whether you will ever need to seek venture capital backing from the very beginning. Once you are self-funded and profitable, it can be very difficult to convert into a venture capital-backed model; venture capital firms will look at your results and not understand why you need funding in first place.
If your startup is your lifestyle business, you will likely never need any venture capital. Just try to optimize what you have to maximize on both market share and profits, finding the right balance. If you want to grow your business into a large company, it is essential to constantly show growth. Try to remain slightly profitable while growing as much as possible. Essentially, try to make it easier to convert from profitability into some burn rate.
4. Recruit additional investors: Customers.
Outside of yourself, the best possible investor in your startup is your customer. They see the inherent value of your product, otherwise they would not be giving you the time of day. You do not have to spend precious time convincing them to invest like you would a venture capitalist, and if you do, it may be a sign that your product is not ready yet.
Because it is important to generate revenues as soon as possible, start with a small product. Get something out the door that brings customers value, even if it is a dramatically scaled down version of your ultimate vision. In ActivTrak’s case, we financed much of our startup costs with a small product completely unrelated to our grand startup idea. It wasn’t going to make us rich, but it gave us enough revenue to get our big idea off the ground.
In the end, you need to decide whether to spend your hours building a better service and better company, or polishing an investor deck.