Most entrepreneurs, especially those looking to start a large scale operation, have considered the value of obtaining funding from a venture or angel investor. News headlines are filled with announcements of entrepreneurs and startups garnering venture or angel funding, with predictions of skyrocketing business success.
Statistically, however, these notable wins are an exception, with the majority of businesses that seek venture funds failing to secure them. Far less than 1 in 100 founders seeking an initial investment ever receive it, and a slim fraction of those fortunate recipients are minority founders; for example, only 1.6% of venture funding has gone to black founders in 2021.
The odds of gaining venture investment are slim. A typical “seed” VC might take 2,000 meetings in a year, making just 10 to 20 investments. One VC said he took 1,600 meetings, and funded 10 companies. Some VCs may take up to 5,000 meetings in a year. To make 10 investments, the average VC firm might review approximately 1,200 companies.
The odds appear to be clearly against obtaining business funding via these capital sources.
The question is: What can an entrepreneur do, instead?
Bootstrapping is the answer:
Many founders decide to fund their projects out of pocket or with funds they obtain via loans. This has several advantages; first, the founder maintains equity ownership in the business, and second, because there is no 3rd party involved, they keep control over the direction of the company. These advantages alone might make bootstrapping the most appealing option for many founders.
Other founders elect to self-fund after pitching multiple VCs and being rejected, or because they feel they do not have an understanding of how VC works.
Bootstrapping means the founder takes all of the financial risk, and if successful, reaps a greater reward. The business might be slower to start and get traction, but the bootstrapping founder maintains control and equity, and can grow as an entrepreneur alongside their business.
Instead of chasing venture capital, here are 5 things to do instead:
1. Build up your own funds first
Build up funds to start your business. These are your own funds from your own earnings and investments, not borrowed funds. You can trim your personal budget and set money aside, and you can increase your income by working side jobs if possible. You can choose to work for companies where you learn something useful to your future business. For example, If your product will be in retail, working in an establishment that could sell your product can be educational.
2. Forget the "hustle" and think "growth"
Despite the drama portrayed in the media - where some energetic entrepreneur has pushed his company to the top like a rocket, claiming fast growth, big financial gains, while bragging about working all night to get ahead - consider how this course of action will affect you and your future. You have to move at a speed you can maintain, or you’ll face burnout.
Instead of chasing rainbows of overnight success, lay the groundwork for growth that will be manageable and sustainable long-term.
3. Hire carefully
Flying solo might sound romantic, but if you intend to grow, it quickly becomes challenging to do it all yourself. In areas where you do not possess the required skills or the work does not involve guiding the direction of the company, hiring a pro might free up your time to do more of what you're good at.
This is where you need to apply good judgement. It is tempting to hire someone to share the work and responsibility, but it’s better to wait until you have refined your vision for your business. That way, you fully understand your business before you need to explain it to someone else and have them take action based on your direction.
Don’t assume that you need to surround yourself with a C-suite of paid executives. Look into contracting basic business services, instead.
When it’s time to hire, bring on employees slowly, even one at a time. Start them part-time or give them a single project to allow them to prove their value.
4. When handling money, think strategy first
You will naturally want to get the most for your money, since you had accumulated your business startup funds yourself, and that can lead to two issues: overspending, and underspending.
The trick is knowing where and when to spend or be frugal. Prioritize expenses that have a direct effect on sales. Pay attention to what works and what does not. Your funds are a valuable tool no matter how big or small your business, and it’s important to cut spending that does not deliver, and focus on activities that do deliver.
Be sure to pay yourself a basic, although not exorbitant, salary, and set aside the appropriate amounts for taxes.
Be ready to negotiate terms. Setting shorter payment terms with retailers who sell your product, for example, means your money hits the bank faster. Requesting longer payment terms with your suppliers lets you sell your ready-to-ship inventory while you still have use of the funds to pay for raw materials.
5. Have a backup plan and be realistic
When you start a business, you are taking risks and making sacrifices, and as a consequence, so is your family. Especially in the startup stages, you will experience a time of financial uncertainty. This is why you will need to have a Plan B, such as an alternative source of funds or a side profession to bring in cash and take care of living expenses while the business grows.
Starting a business with your own money means you will be funneling profits back into building the business, especially at the start. Have a plan for getting more cash quickly, should you need it. For example, consider a line of credit or another type of loan, but use judgement here - a loan, when your business is not producing sufficient revenue, can sink the business and your personal finances. If you have accounts payable or purchase orders, look into funding secured by that pending income. Strike up a relationship with investors, too, even if you are not currently trying to raise funds.
Venture funding is hard to obtain for a new business and few founders succeed in obtaining it. The vast majority of founders take a self-funded approach via savings, bank loans, and judicious use of credit. Start by building a nest egg to tap into for business expenses, if possible. Think in terms of long-term growth even if it is slow, to avoid the potential burn-out of struggling for a fast rise to the top. Be a do-it-yourselfer where possible, and hire cautiously and with purpose. Be frugal, but know when spending will move the business in a measurable way. Prepare for the risks involved and have a Plan B.
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