StartUp Dilemma 2 (When to take investor money/ Bootstrap or Fund)

22 Mar

startup cartoon

So i heard yesterday about this group of really smart people – with great pedigrees, who are collaborating to start an online business in baby products.
I think because of the pedigree and the smartness, they got a million dollars in funding.
Now, 6 months after raising the money, it’s sitting in the bank – and they don’t know what to do with it. To top it, their investors, who got large amounts of equity fairly cheap, now are looking to “grant” their second round of funds – and the founders are faced with dilemma of not wanting to part with more equity!

Classical case – strikes at the heart of when to get funding/ what kind/ multiple sources or single etc etc…(Came across a nice article on the different kinds of funding/ when to use/ typical funding cycle etc here for those looking for some advice)

In the interest of full disclosure – I have to state here that in our company – (not technically a startup – I recently figured that in common jargon, startup is used for a tech product company – though wikipedia seems to vindicate my earlier definition; and mine was a services set up) – we deliberately and by conscious choice stayed away from investor funding, though many came calling, for 8 years, at the end of which we made a strategic transaction.

As we saw it, the reasons we would have wanted money/ the triggers which made us even think about money were:

a) Sales Headcount: When we were about 3-4 mil in revenue, and wanted to scale the business exponentially – we figured sheer legs in the markets would help. Plus, none of the 4 of us founders were core Sales People ( i reaised after i wrote it – that i had capitalised the sales people! telling, i think πŸ™‚ ) by profession really – certainly not of the B2B variety – so it would have been nice to have rainmaker salesmen (yeah yeah, i know there are only about a cple hundred of those in the world πŸ™‚ )

b) Technology infusion: We had started as a very manual services oriented media research and analytics firm. However, being in the right place at the right time helped – since we discovered and rode the social media bandwagon; and that helped create a nice niche. Only problem – this was a very tech heavy field – in the beginning we worked with bits and pieces of shelf bought platforms – but we soon figured that to create proprietary IP we really needed some software – even though we would always be the “software aided human services” side of the spectrum. This needed money – more cash than regular working capital

c) Operations facility – Like all garage mode set ups, we had had fairly unglamorous working areas – (as one prospective/ wannabe strategic investor long ago told us when he came visiting – “i can see that you run a lean facility” – being euphemism for – “gawwwd, this place sucks!”). But this was less pardonable for us than for many others since we were in the people business – and that too in Bangalore, which has many spanking glass and chrome offices! So it wasn’t a product company with potential payoff for a very few like minded people; but a services set up. And, because we were pretty much pioneers in the outsourced space for media research, we couldn’t hire from other places – we were home-growing our talent – but it did mean that other places could poach easily from us when they wanted to develop these same services – with the lure of better moolah, but also better working facilities. (As one employee told me when I was trying to explain lack of ACs in every room – ma’am, pls don’t say we are a startup – you are not one any longer, and even if you are, we dont really care!). So, while it wouldn’t have ever been the main reason to get money, if we did get it, we would have liked to get some nice work space πŸ™‚

EPR office

d) Again, while not the primary reason, there was a part of us that said that if we did get some kind of financial transaction going, we founders may like to cash out to some extent – after all, our skin in the game was really the opportunity cost of our salaries for a long long time – and it would hv nice to have some money for a change…

e) To us the most attractive reason to get into any kind of partnership actually was not so much the money as the channels it would open to us – it was such a new area that to convince clients that this was a viable means of solving their problems just took sheer facetime/ calling and contacts…

See some other folks’ reasons for why formal funding makes sense here

But, we stayed self funded and therefore away from even progressing talks to next rounds due to the the following reasons:

a) First of all, since we were a services ie not capital intensive company working in an offshored model, we didnt really need money to run ops – we had started with a fairly variable cost model (see earlier post), and almost before we had started had a “sponsor” client – so we were positive cash flow from day one.

b) We were already 4 partners so had smaller portions of equity plus some we had carved out for senior members – so we were a little averse to the idea of giving away more equity – i have to confess that here there were minor differences sometimes in the way the 4 folks looked at it – with each of us placing different values on equity vs. expertise πŸ™‚ but we managed to reach consensus

c) Most importantly, it was for us an issue of control – we had trouble enough navigating the waters of 4 masters – imagine the scenario with more bosses added on! As Debjani once said, we are on a fast enough treadmill – if we add an investor we will have to jump hoops and land on a faster treadmill! At that phase we were getting combined amongst all of us maybe 10 hours of sleep a day – the post money scenario made us shudder!

See another entrepreneur’s summary of his experience here

So, to come back to the issue of start ups who do need money – whether because it’s infrastructure (though the cloud has made that so much easier/ cheaper now) or marketing (again, thanks to social media and the like, there are low cost options available now) or enable next round of growth by creating/ adding to facilities or just to tide them over bad times; be very careful that you do need the money, and what the trade offs are before you go ahead and ask for it. Also, ofcourse everybody will advise you on the pitfalls of getting funding – read here for some more. Add to that the fact that nowadays, with facebook fall from grace, apparently VCs are getting wary of funding en masse, specially affecting Series A funding – see here

Which basically then comes down to the following:
There isn’t necessarily a surefire formula for success – the foremost thing is to focus on creating your product/ service, and selling it – if you can do this to a threshold level without extrenal funding, so much the better. Remain true to why you became an entrepreneur first, and what that means to you – is it messing around with code in your garage; managing many people; selling your dream to a potential client, or hobnobbing with the suits (looks like my prejudice is coming through, doesn’t it? πŸ™‚ ) – the best thing to do is go by your vision – if you really want the money, in general if yr idea is good and ur team if good, you’ll get it some way…..Go figure!

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4 Responses to “StartUp Dilemma 2 (When to take investor money/ Bootstrap or Fund)”

  1. Deepak March 23, 2013 at 1:58 pm #

    Good time to get into Consulting so called Start-ups Sangita πŸ™‚ …

    • joshsang March 25, 2013 at 8:52 am #

      sure – u’re still calling yrself a startup? come be my first client then πŸ™‚

      • Deepak March 25, 2013 at 12:09 pm #

        haha.. ready for that πŸ™‚ anytime.. Please come to our office sometime..

Trackbacks/Pingbacks

  1. StartUp Dilemma – 3 (When to Stop Doing Everything Yourself) | joshsang - March 26, 2013

    […] started sniffing around (at that time, we had no interest in any kind of fund raising (see post on when to acquire funds here) – but did need to show “professionalism” – so poor Prashanth did that, to […]

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