Entrepreneurs often raise capital too early, as they believe raising capital validates their business model, whereas in reality only customers do, writes Grovest non-executive director Clive Butkow.
Raising outside capital isn’t the only way to grow a business – it’s simply one way. The goal is to build something great, no matter how or if you raise capital. I would not make it a priority early on to raise outside capital.
Companies such as Hewlett-Packard, Dell, Microsoft, Apple and eBay all started with a bootstrap model. Focus less on raising capital and more on building the business. I believe raising capital takes so much of your time that you get to a point of either raising capital or building your business. I would bootstrap my businesses for much longer before trying to raise capital. Be frugal. Spend less than you make.
Fundraising is a dangerous time-suck for early stage startups. I’ve watched many startups get so consumed with meeting investors or preparing for interviews with accelerators that they lose focus on their product and customers. Every minute you spend talking to investors is a minute that you could be improving your product and delighting your customers.
You see, bootstrapping your early-stage startup does not preclude the possibility of you raising funding in the future. For example after having validated a market and grown to your first 1,000 customers, perhaps you’ll want to accelerate growth and raise funding to grow to 100,000 customers.
That’s a path many bootstrapped companies have taken. Your conversations and resultant deal terms are going to be significantly better having bootstrapped to 1,000 customers, than running round town having investor meetings with zero customers to your name.
Bootstrapping your company before you try and raise institutional capital will also help you avoid giving up too much equity too early, and rather focus on signing up customers to increase the value of your company. Raising capital does not validate your business model, only customers do. Get paying clients before the investor pitch, especially if are in a capital efficient sector like web commerce and other technology plays.
A bootstrappable business model means managing for cash flow, not “paper” profits, growth, market share, or branding. Think of venture capital as steroids: it might give you an immediate advantage, but it could kill your business. Fund your startup yourself.