Financing our startup
Money is the bloodline of any business; once your business runs out of money, it is game over for you. Raising funds is a critical part of establishing a startup and it never stops throughout the lifetime of your business. You need a definite financial plan to avoid tapping into your resources to keep the business afloat.
According to recent research, 73% of small businesses use some form of financing. The issue of raising funds often presents a major problem for entrepreneurs. We have all heard of stories of starving college students working on projects in between classes which not much funding to work with. Most beginners do not have the required funds required so bootstrapping is not a viable option for them. This leaves them with only one option and that is to seek financing from outside sources.
I’ve had some experience with angel investing on the investor side. The issue with angels is their terms are never that great for the founder and secondly, you find yourself giving up a big chunk of your company. Because the truth is, no one wants to just give away their money and not get something in return.
So that probably has you wondering about the best way to raise funds for your startup without losing your ownership.
My approach towards financing
I consider myself to be extremely fortunate, in that if I wanted to put in my own money into my business and retain maximum company ownership it would. I have another project that is quite successful and can sustain this new business until it is on its feet. It is a performance-based Amazon marketing agency that I started in 2007 but pivoted in 2016. We manage brand presences on Amazon and manage their advertising, inventory, customer service as well as their content. From that, I have been able to get payroll and profits, and I am grateful to have that as an option.
The thing about bootstrapping is that it can be quite unsustainable. Sure my marketing Agency is thriving now, but who knows what is going to happen in the future? What if it is not able to sustain us in a few months? What happens then?
Bearing that in mind, I decided to explore other options that would not result in huge losses.
- Family, friends and angel investors
I think I would need about $50,000 to give ReferHub enough “dry powder” to either sink or swim in the marketplace. That meant that I needed a small number of investors. I was only willing to give up the smallest possible percentage of my business. If I could get to raise that whole amount and only give up 10% of the company, that is a scenario I felt comfortable with.
In actuality, if I need that much and don’t have any revenue or proven concept, then I would not be able to raise that amount without giving up a big part of my business.
The best way to go about this is to prove to these people that your concept works and that this product you are offering is something they need. That way, they will be willing to pay for it. And if you get something between 50 to 100 paying customers you will be able to raise enough money without giving up a huge percentage of your company.
There has to be a better way of funding that doesn’t involve giving away big chunks of your company to investors, right?
- My funding solution
There is nothing we all love more than to be able to put our funds into our businesses and retain maximum company ownership. You will not be answerable to anyone and you will run your business as you wish.
I modeled a financial plan and realized that I need about $50,000 for design and UX, for creative content and marketing assets as well as for media spend to get enough data until we are self-sufficient.
That was the money I needed if I chose to stay on the conservative side and hired someone I knew. But if I decided to hire professionals from freelancer platforms such as Fiverr, I would probably end up hiring someone who lacked experience and the project would be dragged for months. And if I went with established Agencies, I would have to pay more with no guarantee of greater value.
Pre-money and post-money valuations
The weirdest thing about the business world is that no one wants to give you their money when you need it, but when you don’t need it they want to throw it at you. I know how weird that sounds, but that’s business for you.
If you are anything like me, you want to raise enough money but still maintain maximum ownership of the business. I mean is it not your idea after all? So how can you get people to throw their money at you thinking that you have money even if you don’t?
What if I told you that there is a way in which you can fund your business with other people’s money while still maintaining maximum ownership. You won’t have to worry about answering any investors; that can be quite rough especially when they own a significant chunk of your business.
The better option
I read a book by Brad Feld about term sheets and raising money. He explains the whole idea of pre-money and post-money evaluation. I loved this book so much and it greatly influenced my idea of raising funds. Let’s use $50,000 which according to my approximation, is the total amount of money that my company needs to get started (the pre-money). He advises that you target to raise a value that is greater than the actual pre-money value says $100,000 from investors. And maybe if your business requires $1 million, you target about $1.1 million. Use this amount when raising funds from other people and what you will realize in the end is that you will raise more than you need and only give up a very small percentage of company ownership.
When your target is higher than your actual pre-target, you will end up raising more than you need (the post-money). In our case maybe we might end up raising about $80,000 which is about $30,000 more than what we need. That will give us a runway or some dry powder in the form of money to create assets and bring in consultants as well as acquire traffic.
Another huge advantage of this approach is that it does not water the founders down in terms of their control over the company. And the best part is that the investors get some value as well. I think that it is a great idea to keep investors in check while providing value for the investors.
Also, do not be over-ambitious and raise crazy amounts of money. like, say you need $500,000 and then you target $5 million. It is going to lead to problems with your investors in the future. I have seen people raise money on a $5 or $10 million pre-money valuation because they have the experience. I did not want to do that and I strongly advise against it because disappointment is inevitable down that road.
Lastly, ensure that you get as much growth hacking as possible with free in and that’s what I’m doing. I am trying to get some cheap paid media as well as talking to a bunch of people in the space just to try and get some momentum going before I start spending money.
I have been an entrepreneur for a while now and that has come with its amount of freedom and flexibility. Giving up a lot of ownership to investors means having a boss breathing down my neck every weekend looking at numbers and that would suck. I prefer to have a partner who I can update once a month without any pressure. Whatever funding option leaves you fully in charge of my company is the way to go.