"Fundraising is going to be the death of me!"
That's how I've felt, oh, perhaps 10 times throughout my journey to date as a serial entrepreneur.
Any entrepreneur will tell you that raising money can be the toughest part of starting your own business. While the competition for funds gradually increase each day, your chances of securing investors significantly slims. Of course, finding an investor isn't impossible, but one of the best decisions a business owner can make is to find alternative means that will contribute to their financial success.
Tom Walker, President and CEO of Rev1 Ventures, has been helping entrepreneurs build great companies for most of his career. He's formed multiple venture capital funds, founded angel groups, is an angel investor, and has used Rev1 Ventures to help entrepreneurs build great companies by supporting them through the first phases of growth.
Having helped entrepreneurs for years through Rev1 Ventures and with his book, The Entrepreneur's Path: A Handbook for High-Growth Companies, I asked Tom to share a few alternate ways startups can raise funds without having to pitch to investors. Here's what he had to say:
One of the most common misconceptions by entrepreneurs is that they must raise a great deal of up-front capital to succeed. This is simply not true-nor is it usually possible.
So if you'd like to avoid giving up equity before you have to, heed these five tips to move from bright idea through prototype without raising bundles of investment capital.
1. Open your own wallet first. Tap into savings, home equity, or retirement accounts. It's risky, but don't expect others to invest in your startup if you haven't put some of your own money in. Knowledgeable investors want to see founders show confidence with cash. They favor entrepreneurs with more than "just" sweat equity in the game.
2. Sign up strategic partners early on. There's nothing sweeter than finding a supplier, distributor, or especially a customer who stands to gain so much from your solution that they are willing and able to help foot the bill.
This is a planning-for-success bonus play.
- The quality and reliability of your supply sources, whether for materials or software will be key to your success. Far better to create relationships and work out the kinks while your company is simple and small than to discover an issue when you're ready to scale.
- If your solution aligns with a B2B business problem that the market is clamoring to solve, there will be potential early adopters who could make a strategic investment if they think you have a chance at relieving their pain.
- Early adopters provide and unique and invaluable hands-on perspective of what's right and what needs to be changed to improve the value proposition of your solution to the markets you plan to serve. These companies will be less focused on final returns and more interested in getting your prototype to beta.
- Every startup has to sell its stuff. In-house sales teams are challenging to staff and a challenge to manage. Before you build a direct sales team into your business plan, explore other options-online, manufacturers' reps, or companies in your industry that sell solutions that could be enhanced by yours.
I've seen more examples than I can count of early relationship between startups and strategic partners that turn into something really special that endures for years. There's something very appealing about being part of a local startup's success-especially to corporations and service providers who are right in the startup's own backyard.
3. Bootstrap. Paying as you go by earning revenue from early adopters and managing every dime like it was a dollar is the most cost-effective way to stretch your company's resources-financial and otherwise.
Nothing is scarcer than cash (except maybe sleep) when you're starting out. The more you can bootstrap in the beginning to achieve good market validation, the easier you are going to find your path to raising capital.
Hold fixed costs to a minimum:
- Share office services and equipment
- Co-locate with another company or move to a business incubator
- Use the computers and servers you have
- Delay capital purchases
- Leave instead of purchase
- Negotiate fees and terms with all service providers and suppliers
Treat variable costs like you're spending your own money, which you are:
- Seek trade credit terms with key suppliers
- Save thousands on travel by using smart scheduling or teleconferencing
- Hire interns from local business and/or design schools
4. Pursue non-dilutive capital. Grants, solicitations, and RFPs may not be a fit for every company, but make sure it's not "yes" before you say "no." Some industries, such as biotech, are especially conducive to federal grants.
And don't forget to look in your own backyard. More and more cities, regions and states have grant programs or loans for high growth businesses at low-interest rates.
The beauty of these sources is that a startup may qualify for large sums of money, which are milestone driven, which is the way you ought to be thinking and operating anyway.
5. Match capital to milestones: Too much capital is as bad as too little. Matching capital requirements to achievable milestones keeps the company from giving up equity before it's required.
...and a bonus
6. Establish a line of credit. Even if you don't use it, bankers will return your calls once one of their competitors has vetted you.
There are no silver bullets when it comes to sourcing early-stage funding, but with the right capital strategy and a concentrated emphasis on bootstrapping entrepreneurs can avoid shooting themselves in the foot.
Now it's your turn. How have you attempted to secure your startup's financial success? Which of these methods have you tried? Let me know your thoughts in the comments section below.