Self-Funding Your Startup
Pop culture leads us to believe that everyone is getting funded with million dollar competitive term sheets with catchy buzz phrases like “Uber for cats” or “Airbnb for Ice Skates.” The stark reality is that very few startups get funded. To qualify this reality, many will cite a Fundable report that claims less than 0.05% receive at least one round of VC and 0.91% receive angel funding. Digging deeper the numbers are likely even harsher since the definition of “angel” funding could be an affluent uncle.
For simplicity, we could agree that 1% receive some outside equity funding from a non-founder, which means the other 99% is figuring out how to self-fund the firm from day one. Funding can come from many sources such as savings, personal debt, or more creative sources of trade funding. Taking out personal debt to fund a startup firm is a precarious and ill-advised strategy.
Creating an independent startup firm is not merely a possibility or thought exercise; today, it is highly plausible. The computing tools, network effects, and your hard work can combine today into a value creation force. Creating value is the outcome every VC is after and exactly what you need to build a successful self-sustaining profit model. The faster the firm generates value, the faster the growth momentum will grow. Many firms today can get started with less than $5,000 and begin a rapid value creation cycle.
Time out for just a minute. There is a little saying that anyone can be a millionaire if you start investing early enough. Only invest $5,000 at 5.5% return and wait for 100 years. The illustration is an annoying and unproductive exercise in mathematics since few live to be 100, and the investor surely wouldn’t live long enough to enjoy it. This compounding equation is the hard math that we need to build your successful firm, and the math is your profit model.
The profit model defines how your business will consume cash, how fast it will replenish the cash, as well as the revenue and associated expenses of the firm. Together these elements converge to create the simple math that will determine if your idea is a value creation vehicle towards self-sufficiency.
Forget about VC funding or raising capital and start thinking about how you can generate value and cash flow to sustain your growth.
Recall the conditions outlined above of tools, network effects, and hardwood. We should arrange these into our first formula to illustrate what is happening today.
Hard Work x (Tools + Network Effects) = Rapid Value Creation
Hard work is Human Capital – the real blood sweat and tears that builds any firm.
Tools are Equity Capital – The cash available to pay for expenses, and we stretch this as far as possible through frugality.
Network effects are the Social Capital – The world is connected, and our reach is fantastic. Sometimes we fail to realize the immense power we hold in our smartphones to literally “reach out and touch someone” to hark back to the long-distance commercials of another era.
Maximum effort is pulling 110% of your potential into your firm. The best opportunities are a match between your skills and the purpose of your firm. You may want to build a rocket company, but if you are not a rocket engineer, the efforts you can contribute will not propel the value of the company. The skills of the founder or in many cases, the founders – plural – drive the value in the company. If you do have multiple founders, the skills do not need to be uniform or even equal. Each founder must to contribute to the needs of the firm and be able to generate the necessary results to fulfill the market opportunity.
Recruiting co-founders can be a very effective strategy to complement the talents of the founder without the need for cash resources. Complimentary skill sets can create more value than if each founder were to attempt to pursue the opportunity alone. One plus one can equal three. Having internal talent means you need less external help, which cost money. A strong fit between the market opportunity and the internal expertise of the firm will preserve resources and drive initial growth.
Maximum effort means just this. Many side-gigs are a nice hobby but fail to materialize because the energy lacks to create success. You cannot do everything all at once, so focusing the efforts on the most critical task to propel the mission forward is paramount. The effort is a force multiplier, and frugality will fill the void.
Equity capital initially comes in the form of a cash investment into the firm. Maybe this was $5K or more, but likely it is closer to $100. A $100 can be okay if the profit model is generating more cash internally, which can begin to fuel the growth of the firm.
Self-generating cash flow is difficult to achieve and is the by-product of lots of hard work and even more discipline. The firm generates a sale, receives cash payments for the sale, and pays off materials use to service the transaction. The remainder is the gross profit on the sale. If the only other expense is your labor, well, guess what, at this point, you are working for free. This new cash generated by the sale can be used to strengthen the profit model and create more sales. Once the cash generation is high enough, you can begin to pay yourself and other founders to the extent the profit model is generating excess cash.
Selling is the only way to generate cash, and it is vital that the firm find something to sell as quickly as possible. The brand image needs consideration here, and it could be unwise to begin selling lawn-mowers to generate cash to sell canoes unless there is some market bridge between the buyer of your lawn-mowers and the eventual buyers of your canoes. Find something to sell that is complementary to the first product or service A can be used to generate leads for potential future buyers of the more profitable product B in development.
At Finive, we love product companies and the grit that is involved in actually making something and selling it. Many times we find that service firms can increase their profits significantly by selling a complementary product and vice versa. A product firm can increase its profits by selling a complimentary service. The either-or of product or service seems to have died. Think of great product companies like Nest, Square, Ooma, that all make a “thing” and have active service businesses fueling growth.
The critical success factor in preserving Equity Capital and propelling growth is to start selling as soon as possible. The firm needs to simplify, simplify, simplify so a minimum viable product can launch as quickly as possible. Yes, this will inevitably mean lots of manual processes and likely non-tech savvy back-ends. Throw your human capital in the gap to begin selling and generating cash. Fill the void with pure frugality.
Social capital does not mean that you sign up for 150 social media networks and attempt to dominate all of them. The social capital of your firm is the ability to leverage relationships to generate sales, locate suppliers, find talent, and make your firm bigger than what it is.
Building a profile of your target buyer will allow you to focus deliberately on reaching them. This profile should encompass everything you know about them – their needs, problems as they would define it, expectations, likes and dislikes, location, demographics, and how you can reach them.
Building the network of the firm is fuel to growth. When you need a solution to today’s problem, it is great to be able to turn to a particular colleague or resource to solve it immediately. A strong network also allows you to be a connector and problem solver for others in your network, making you a critically important part of their success. Work hard to cultivate social capital that your firm can leverage to grow – both online and offline.
Rapid Value Creation
Finally, we are creating value, or at least this is the point. The firm has to create something meaningful for the clients and market it serves fo the process to work. By creating values for others, the firm receives revenue for this value and in turn, generates value for itself. Typically the value has to have a multiplier of ten to get paid for it. If a colleague suggests, “hey check out Google, I hear it is a great search engine,” you will likely say “thanks for the tip buddy.” If the same colleague helps you rebuild your flux capacitor and saves your weekend so you can make it to your outing with friends you will likely open your wallet and pay dearly. Value creation and it is the perception of the value created to the buyer that matters the most. Surprise your clients by creating more value than anticipated.
Finive offers Tru Win to simplifies the self-funding process so that you can build your big idea into the Tiny Firm that is your win. A tiny firm is a company that has a focused product offering and incredibly high revenue per employee. The goal is to rid you of pitch decks, hollow investor feedback, and the wall of barriers created in your mind.
We know very few startups ever get funded by VCs, and a vast majority fail because of cash flow. Tru Win’s mission is to help you create a self-funding business model so you can grow and grow fast.