DFN: Interesting point of view, valid points about minimizing your requirements and try to avoid the need for outside sources of funding, outside of your ability to control.
Start-up Entrepreneur on Software Engineering, Usability and Start-Up Business
The Zen of Raising Start-Up Funding
2009 November 6 by pharazon
I started recently to offer Financial Advisory consulting services for other Start-Ups due to my succesful track record in raising funding for my own companies. To leverage my combined experience in Financing and Start-Up business I’m looking for good business ideas to mentor, advise and to invest in. The idea is that if I get personnally convinced of the Start-Up’s potential, I can increase the value of my Business Angel investment 10-fold by pitching in government grants, other business angels and VCs :).
However, before you should contact me, you should first reconsider at least these two aspects:
1) Is your idea organized as a proper Growth Start-Up?
I recently read the magnificient book by Timmons, Spinelli and Zacharakis: “How to Raise Capital” that I suggest every entrepreneur wishing to join the Start-Up funding game should read first. I will post an article about screening of the growth start-up requirements later, but to mention one, you should never for example say in your pitch that it’s enough for you to get 1% of the world’s market to be profitable. The VC would think that he would rather invest in the market leader who gets 50% of the market. Secondly you shouldn’t bother to invent a better mousetrap (an incremental improvement, where corporations thrive in), but look for distruptive market innovations (as defined by Clayton Christensen) that the large corporations are unable to follow or cope with. Mark Twain once said:
“The best swordsman in the world does not need to fear the second best swordsman in the world, but rather the man ignorant of swords but knowledgeable about gun powder.”
2) Minimizing the need for capital
According to Timmons, Spinelli and Zacharakis, the difference between an entrepreneur and a corporate manager is that the latter one tries to maximize the amount of resources available for him, and yet thereafter to acquire a little extra to cope a downturn, while an entrepreneur seeks the opposite: to minimize the amount of resources required to run the business. From this truism, you can see many fundamental implications to the daily life of a Start-Up and why corporate managers will ruin your business.
From the financing point of view (and my Financial Advisory) the first step is thus not to raise the maximum amount of capital that you can, but the opposite minimize the capital requirements in the first place. Raising the money for a good idea is not the problem – the world has today (even after the financial crisis) an excessive amount of capital floating around and unable to find better yields than you get from the bonds and the interest (2-5%). Thus if you can tell a believable investment story (please contact me for help in converting your business plan to a fundable Investment Story and the “Investor”-language), there is no limit to the capital you can raise. One famous example is the Swedish fashion Start-Up Boo.com that raised 188M USD and burned it all in just 6 months by flying in First Class and living in 5-star hotels.
To launch a succesful Start-Up is like the Zen of Raising Finance – you should raise funding without getting any investments. Here are a few basic tricks that you should consider first.
The reason why the entrepreneurs should first consider substituting their intellect to the capital is that the longer you can manage keeping your business on the growth track without getting external funding the more your personal valuation will grow, or lower dilution. For example personally when I started CMAX.gg I invested the bare minimum capital for shares (0,01 EUR per share), applied two government grants and got the hosting marketplace launched in 3 months (using Agile/Lean Product Development methods; Extreme Programming). After proving that the idea is working, I managed to get the first extrenal investors to invest in at over 30x valuation to the price of my initial investment in just 9 months. Please calculate the ROI for my invested initial capital :).
The staging of the required investments is important from the entrepreneur’s personal valuation point of view, but also to practice the discipline of limited resources that gets you to think hard about the foundations of your business model. The more you think how you can run the business a few months longer without taking the bank loan, the lower capital cost you have and the higher valuation you can have, given that you progress in lowering the sunken costs, overall costs and the risk. In addition by executing the option to not purchase any resources you gain the flexibility to decommit quickly. You should keep all the time your multi-staged fund raising plan and the alternative options up-to-date for at least the next 3 years.
Bootstrapping is the process of resource minimization until the end of each stage or decision point (or raising the company up from the boot straps). A succesful entrepreneur Greg Gianforte (McAfee etc) stated:
“a lot of entreprenreurs think they need money,… when actually they haven’t figured out the business equation“.
To avoid the faith of Boo.com, you should check first that you are thinking like an entrepreneur and your team is thinking the same way. If you nevertheless do have a corporate manager (who can be very valuable if used properly, please read Geoffrey Moore: Crossing the Chasm) or other non-entrepreneurs such as an investor on your team or board, follow the advise by Art Spinner: i) Treat your board members as individuals ii) Always be honest to your directors iii) Found an audit & compensation committee iv) Never found an executive committee.
Personally I managed for example to utilize my government subsidied Student Loan to raise the R&D capital for CMAX.gg. Secondly I managed to gain the experience how to run and fail an Extreme Programming R&D -project on a university project, so I got the skill how to avoid the largest tar-pits for free. Also our 5-member coding team used the university premises for the first month until we managed to rent an office from the local business incubator.
At least in Finland you can easily access a wide range of government subsidies for hiring all kinds of consultants. Unfortunately the Start-Up logic is the opposite – you can’t outsource the skill how to run your own business. The art of using consultants is also Zen-like: when you need consultants you should not use them, but do the work yourself. Only thereafter you know the tasks for which you should have needed the consultants for, but often you realize that there is no need for the consultants anymore. If you use the consultant without first being knowledgeable about the topic yourself, you are just wasting your scarce financial resources for no gain, and demonstrating mental laziness from practicing the entrepreneurial bootstrapping.
The OPR stands for “Other People’s Resouces” meaning all the different ways how you can barter, acquire, consult and loan all kinds of valuable resources for your business. If you bother to deeply analyze and understand the business you are in, this is probably the most significant method, how you can manage to lower your capital requirements footprint the most. The alternative is to pay huge amounts of money to consultants (and ignore their advice) as what the large corporate managers do daily to avoid the mental stress and political risk of taking responsibility. By being knowledgeable about your industry you can easily tune your business model so that you can substantially minimize your capital requirements. The basic MBA -way is to find different ways how you can negotiate longer payment times and shorter invoicing durations. The best alternative is actually to get your customers to pay in advance, for example by having an advance customer account like on the #CMAX.gg marketplace.
Find different ways how you can loan money without interest from your FFFs, clients and suppliers. Try to get advance payments, postponing of government obligations, talk and ask for bids from consultants (for free advise), utilize people at trade associations and the tax office to investigate on your business plan details, and every smartly think all possible ways how you can avoid from using your most scarce resource the cash. The most suprising method to raise capital for your business is to actually to pitch your business case to and ask your customers to pay for you of the product or service you are providing :). Consider always starting your business as a consultancy to bring in early cash flow, filling out your CRM prospect list, learn the domain industry details in a safe manner, and investing your excess cash flow in product development. If you don’t have any skills that your prospective customers would value, it is unlikely that you can leverage them by developing products either.
4. Lean Operations
Amar Bhide has said:
“a startup is like zero inventory in a just-in-time system: it reveals hidden problems and forces the company to solve them.”
Invest your personal time in learning the Lean principles by your heart. After knowing of the Lean, Kaizen, Kanban and all the related methods, study next the Six Sigma, which is the second sub-school of the TQM and allows you to find even more fundamental ways how to avoid waste and minimize your capital requirements in every operation from sales funnel to product development.
In another words, instead of first sending your business plan to the venture capital, think about the ways how you tune your business model so that you don’t need any capital in the first place, and the business model is generating large amounts of free cash flow when it grows. If your business is draining capital as it grows, you should not probably be growing.
The 99% of the world can afford mental laziness and avoid thinking very hard how they can manage their daily lives. The entrepreneurs however, do not have this luxury, but require the mindset of trying to always minimize the capital commitments for lower dilution and lower personal risk. The main tools for a succesful entrepreneur are the Staging of investments, Bootstrapping or minimizing the capital footprint, the Other People’s Resources and the Lean operations. Instead of hiring a consultant to do the thinking, you should invest your own brain capacity to do a small excersice in Excel and trying to simplify your business idea in a formula that tells yourself and the investors a success story.