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Raising Capital | September 3, 2007

Funding a Start-Up

Posted by Tony Hsieh at 7:46 AM

I met a distant cousin of mine for the first time in my life recently. He came and visited me at our offices, and after I gave him a quick tour, he asked for some advice on a new e-commerce business he was thinking of starting.

One of his questions was about financing his new company, and he wanted to know whether it was better to raise money from a bank or from a venture capitalist. My advice to him was to do neither.

Raising money, whether from a bank or from a VC, is a time-consuming task. It's a full-time job in and of itself, and the chances of a bank or VC funding a business that's just getting started are extremely slim. I told my cousin that his time and efforts would be better spent on building and running the business instead of on fundraising.

Even if he were successful raising money, the ongoing headache of talking to a bank or investors and keeping them informed about the business can be a huge distraction and take time away from focusing on the actual business. So my advice was to try to self-fund the new business as much as possible without a bank or outside investor for as long as possible.

However, there is one source of "funding" that I did encourage my cousin to explore more: vendors and suppliers. Since he was starting an e-commerce business, I recommended to my cousin to talk to his suppliers and try to partner with them to create a win-win scenario. For example, instead of pre-paying vendors or paying vendors on standard net 30 terms, what about placing a bigger order but asking for net 60 or net 90 terms? This would help with my cousin's cash flow, and the vendor would make more money in the long run.

At Zappos, we avoided working with a bank or venture capitalist for as long as possible. It wasn't until after we had been in business for four years that we first started working with a bank, when our business was more predictable. And it wasn't until we had been in business for over 5 years that we raised money from a VC in order to take the company to the next level. (By then, we were on track to achieve over $175 million in gross merchandise sales.)

So my fundraising advice to my cousin and to anyone just starting a new business is the same: Avoid working with a bank or venture capitalist for as long as possible. Instead, try to fund your new business yourself for as long as possible, and try to partner with your suppliers and vendors to help with your cash flow.

And what about raising money from friends and family? I would only do that if both you and they would be okay if the worst-case scenario happened and you lost all of their money. Otherwise, if you value your relationship with them, it's probably not worth the risk.