Some businesses can't get off the ground without an injection of capital whereas other companies succeed due to resourceful owners who tap existing resources along the way. If you're not sure whether you should pursue venture capital financing or bootstrap, ask yourself these two questions.
If you're a regular reader of tech and business press, or even if you just glance at the odd tech headline, you'd be forgiven for thinking that there's only one approach to starting a tech business today, and that's venture capital or VC. The VC route is, of course, a great option for lots of people, but as someone who built a profitable business via bootstrapping, I feel I have a duty to at least raise the possibility that the VC-focused strategy isn't for every business.
Some businesses simply can't get off the ground without a cash injection. I was lucky in that SpareRoom didn't need cash, just a lot of my time, before it started generating income quickly. Not everyone is that lucky. But rather than tell you how I succeeded in building a business generating over $11 million in revenue over the last year without funding, I'm going to ask you to consider two simple questions.
Is VC right for your business?
This may feel an odd starting point, but let's begin by looking at why VCs reject deals. The simple answer on many occasions is because the market isn't big enough. VCs have high requirements when it comes to the return on their investment. That doesn't mean every business they back has to make a certain amount of money. In fact, Micah Rosenbloom, venture partner at Founder Collective, says that historically, only one of every 10 companies a firm invests in with a given fund will be successful.
What that means, however, is that not only does the one that succeeds need to make enough to cover the losses of the other nine companies, but it needs to generate all the returns for the fund on its own. In order to do that, that business needs a huge market to play in. You may have a killer idea that would translate into a successful business, but the potential of the opportunity may not be enough to secure VC interest. That doesn't mean it's a bad idea, just that VC isn't the right route.
Thankfully, you don't necessarily need VC money to get your business off the ground. Consider the alternatives. Does your business have a cash-generating business model? If so, you can probably start with a credit card. If not, could you change the model? Other options include business loans, grants and prizes, angel investors or even loans from friends and family. The upside is most of these won't require you to hand over a slice of your business.
Finally, don't forget that bootstrapping can be a step along the road to raising VC finance. VCs will give you much better terms if you can prove your business works without their cash. I've never sought out VC funding but regularly get calls and emails asking if I'll reconsider, including a few from VCs who've chased us for years now, simply because we've proved we can make money without funding, which makes us an attractive proposition. If I wanted to take funding at a later stage to grow the business, then I know there are people there waiting to take my call.
But there's a potentially more interesting question…
Is VC right for you?
It can be easy to get swept up in what your business needs and forget that you, as founder, are just as important as the idea you're trying to sell. If you choose the VC route, you'll need a certain amount of confidence and self-belief. Are you prepared to stand up in front of powerful people and pitch your business to them every three years and accept rejection when it comes, often repeatedly? If not, you'll need to employ someone you trust who can do it, and you'll probably be judged for it, because it looks bad to have a founder who lacks confidence. It's also important to understand how time-consuming this pitching process is. It will take your focus away from the operation of your business – something you have to be prepared for and an aspect that often gets overlooked.
Ask yourself why you want to be an entrepreneur. Is it to get rich and be famous or is it because you're passionate about an idea or want to solve a problem you've discovered? The answer, of course, may be a mix of all those things and a few others as well. There aren't any right answers. But, and it's a big but, if you aren't passionate about the idea and you're just focused on a lucrative exit, you may want to reconsider.
Even if you're lucky enough to be one of the few people who build a business you can sell and retire on the proceeds, you're going to be in it for the long haul. The typical journey from startup to sale is seven to 10 years, and you need to be able to sustain that passion and make sacrifices for the duration (more on those sacrifices in a minute).
There's one final thing to discuss and that's control. Most people start a business, at least in part, because they want to be their own boss. If you raise financing that's not necessarily the case. Big decisions need to be voted on by a board, and that can get messy. It's even possible to be removed as the CEO of your own company, even if you have a majority shareholding – it's happened.
If you own the company, you have control over what you do. And the great thing is you'll know your product and market way better than a bunch of VCs. VCs have to know about a lot of markets to make educated decisions about whether to invest in them. Sometimes your sector knowledge will be so overdeveloped or niche that the VC may not want to invest the time to learn enough to make an educated decision – that should be seen as an opportunity, not a failure.
As an entrepreneur, the sacrifices are huge – your personal life and relationships can suffer and, at the end of the day, it's difficult to just "turn it off" off and go home. Downtime may be hard to come by when you run a business, but it's crucial. You need to find a way to wind down and create a break from the day. One successful founder I met told me he got in his car at 3 a.m. every morning and drove through London, just to try and clear his head to be ready for the day ahead. It can be tough, and it can be lonely. In fact, it will be tough and it will be lonely. But it's also an amazing journey.
So what keeps me motivated? I'm passionate in my belief that living with the right people beats living alone, but that too many people end up with the wrong roommates and don't get that experience. Where you live is such a fundamental thing to everyone – it never grows old and the challenge is one I've happily accepted for the past 13 years, but I'm still excited to get up every day to grow this business and provide an amazing experience for our customers.