Does every startup need outside capital to get started? To listen to venture capitalists speak, business is a case of “survival of the fittest” and startups are tiny tadpoles swimming in an ocean full of sharks.
That may be true in some cases, particularly when a business idea is attempting to address a multi-billion dollar problem with what its founders hope will be a multi-billion dollar solution. But how often is this the case?
Another way of thinking about this is: how many “unicorn” opportunities exist, and are you setting out to build one? (A unicorn is a start-up with a valuation of $1 billion or greater)
Back on planet earth, most founders are wisely looking to establish their businesses in niche markets where established incumbents have kindly overlooked potentially rich opportunities. In these circumstances, it might be most advantageous for founders to defer the pursuit (and acceptance) of professional (venture) capital for as long as possible.
For the simple reason that VCs generally have a slightly different alignment to the interests of founders. That is, VCs succeed when their portfolio companies succeed. And to mitigate their downside, VCs normally insist on terms that mean, should things not go according to plan, their downside is limited, while the founder’s downside isn’t.
How can a founder strengthen their hand in any negotiation with investors? Simple – by removing as many unknowns as possible from the business model. Build a prototype. Sign up a bunch of customers. Generate traffic. Get some media buzz. God forbid, make some sales.
Prove the market wants want your solution, and that you are capable of building, and delivering it. The longer founders can go before bringing in VC funding, the better the terms they can negotiate.
In the case of the organisation I founded in 2003, VC funding wasn’t an option as there was hardly any capital available in Australia. We bootstrapped our operation through to profitability, then sought outside capital to accelerate growth once we saw an opportunity that self-funding wasn’t sufficient to address.
How can you tell when is the right time to seek investors? There’s no easy answer to that question. So much depends on your ambitions for your business, the value you place on your own autonomy, your personal circumstances and ability to self-sacrifice with “sweat equity”, how capital-intensive your product build is likely to be, and much more.
A 23-year-old founder who has just finished university is much more likely to be happy living on ramen noodles for several months and sleeping under their desk than a 38-year old founder who has a spouse and two young children.
Regardless of the path you choose, remember one more thing. The ratio of stories in the media about successful start-ups versus failed start-ups runs at about 100 to 1, if not higher. We all love reading about unicorns — the Googles, Facebooks, Ubers, and, more locally, the Atlassians of the world. But remember, these are extreme outliers. They are lottery winners, and the worst thing you can do is model your business plan on a winning lottery ticket.
My experience has been that there is one key to building a sustainable business. Find something you enjoy and have fun with it. If you enjoy every day you’re working on your project, and you’re able to build a team of like-minded colleagues who find your mission compelling and energising, chances are you’re on your way to building something of great value.
Whether it’s a horse with a pointy horn on its forehead is another question.
Jack Goodman is the founder and executive director of yourtutor.edu.au