One of the benefits of developing a clear math story and accuratelyanticipating future cash flows is getting a clear picture of your ven-ture’s capital requirements. In his classic book, Growing a Business,Paul Hawken quotes Abraham Lincoln in making a point about fund-ing. “How long should a man’s legs be?” Lincoln said, “Long enoughto reach the ground.” How much money does your startup need? InHawken’s view, you need enough money to “get to market.
But exactly how much money this means is not always clear, andan intense debate has risen over the past decade about the value andwisdom of raising any startup capital at all. On one side is the well-worn bootstrapper’s path, full of proud, gritty, ramen-eating stalwarts,who disdain any form of outside capital. Some proponents of this viewbelieve that early money in the bank causes founding teams to becomelazy, to become unfocused and undisciplined, and to lose touch withthe market realities. Others cite the importance of retaining maximumcontrol over the venture and one’s equity stake in it, as well as avoidingthe risky burden of debt.
On the other side are investors and entrepreneurs who advocatefor well-capitalized ventures, pointing to evidence that better-fundedbusinesses succeed at higher rates.10Over the years, I’ve heard severalfounders who take this view say, “I’d rather own a small slice of asomething very successful than a major piece of something that fails.”
Based on my experience and research, I take this view as well, believ-ing that your level of passion and preparation, as well as the marketdemand for your concept, are independent of how you capitalize yourbusiness. If you are capable, committed, and prepared as a founder; if you bring a healthy market orientation and have identified real market demand for your idea; and if you have planned with rigor and realismand have worked out a compelling math story, why wouldn’t you dowhat it takes to fully fund your plan’s success?
I do observe, on a regular basis, the dangers of unchecked spending.But spending too much money, per se, is never the real cause of newventure failure. The cause is spending it on the wrong things, whichtypically means overspending in some areas and underspending in oth-ers. Lynn Ivey now regrets not putting more money into upfront mar-ket development and proving that her high-end concept would fly, andshe would avoid pouring upfront funds into a fixed real estate asset.
Here is a set of principles to help you think about funding yourventure, whether that funding comes from personal savings or outsidesources:
- Take the long view. Work to understand the longer-termimplications of your funding decisions. Too manyentrepreneurs solve today’s problems in ways that limitfuture options. For example, raising your initial money bygetting small donations from a large group of friends andfamily members may be the easiest approach in the shortrun, but you may regret it later, as more sophisticated later-stage funders often avoid deals with large groups ofinvestors attached.
- Understand your control needs. Few funding sources comewithout some loss of control. Are you willing to cede totalcontrol and build your venture under some form ofinvestor or lender oversight?
- Dig the well before you are thirsty. Raise money before youneed it. Nothing scares away investors and lenders like anentrepreneur in financial crisis. If you have developed aclear math story, you should be able to anticipate wherecritical investments will be needed to get your business offthe ground. Because raising capital usually takes longerthan expected, wise founders are always thinking aboutfuture sources of funds and cultivating those sources.
- Raise more money than you think you will need. New ownerstypically view their business through rose-colored glasses,overestimating early revenues and underestimating earlycosts. A general rule of thumb: Determine what you willneed for a successful launch, in realistic terms, and thendouble it. Everything will take longer, and cost more, thanyou expect.
- Realize that raising money does not equate to spending it. You can manage your business with a bootstrapper’smindset while maintaining access to a healthy reserve.Invest with confidence in areas of clear priority, but staymindful of your overall expense base.
- Consider a wide a spectrum of potential sources. Considerpersonal savings, financing from banks, equity investmentsor personal loans from friends/family, angel or venturecapital investors, bootstrapping, etc., but understand thetradeoffs associated with each.
- Understand that funding choices are highly personal. Yourdecisions about funding your business will be driven byyour purpose, desired lifestyle, risk-tolerance, etc. There isno single “right” approach to funding your business.