I get asked over and over about my thoughts on funding and raising capital as an entrepreneurial company.
Equity is perhaps the most expensive money you will ever find. I strongly recommend that an entrepreneur bootstrap their company for as long as they can.
Many different business models are very difficult to bootstrap. In a product business, for example, you have the production costs of actually creating the product. In a services business, on the other hand, it’s a lot easier to self-fund your startup and to bootstrap by generating revenue early on. Those cash flows can then fuel your business.
Whatever your model is, if you can find a way to bootstrap and leverage your own funds to get off the ground, there is significant value that you can retain. It’s not just financial value, but the value of controlling the entity by not having your vision watered down by the whims of others. This will pay dividends down the road in different ways.
I often challenge entrepreneurs to think of creative ways to bootstrap. They can work with customers to have them prepay or offer discounts for prepayment. How about leveraging services or alternate business models to get the business off the ground?
Debt is a good option if you can find it and ensure that it won’t limit your ability to execute (remember, you do have to pay it back!). I’m not a big believer in personal debt, but I think business debt can be leveraged very effectively in order to help get a company off the ground. If you go out and raise capital, there are other considerations to keep in mind.
Ultimately, the longer you can postpone raising capital, the more beneficial it is for the original vision of your company.
The world around us often celebrates fundraising. If you think about it, that means that a company needed an outside cash infusion to sustain itself or to capture a market opportunity. Would it be so much better if the company was so wildly successful that that capital was never needed and if it could generate that cash itself? Of course! But it’s hard to do!
What I recommend is that entrepreneurs focus on going as far and as long as they can. Capital infusion can be a wonderful thing, but if you take it too early on, you lose the opportunity of disciplining yourself and creating those good habits that are created when you have to just squeak by. You also lose the opportunity of being concretely focused on nothing but delivering your vision.
Raising capital is a very time-consuming process. It brings others to the table who can often distract you from your vision and throw a wrench into what you’re trying to do. It can also become addicting.
Companies go through one fundraising after another after the next…and it really distracts the management team from what they need to accomplish. Raising capital can impose constraints that require companies to have reporting that is years beyond what they really need to have at that phase of the company.
The longer you can bootstrap, the longer you can postpone the capital raising and the more beneficial it can be for your company.