Bootstrapping vs Raising Out of the Gate
The Six Questions to Ask Yourself
A lot of founders debate whether or not they should try to raise capital or get a product up and running—perhaps even get some customers. Well, I’m here to give you a definitive answer.
It depends.
Oh, come now. You knew that was coming. There’s really no one size fits all answer, but I can give you a set of questions that can help you clarify a few things.
#1 Can you focus on this for any reasonable period—I would say 3-6 months—without putting yourself in serious financial difficulty?
Before you think about anything else, be honest with yourself about your own economic reality. Do you have dependents? What does your overhead look like? How quickly do you think you could get another job if you can’t raise money or get going successfully after this period?
These are all important considerations in determining whether you need to raise money to start something up—because while I appreciate the side hustle, I think it’s incredibly difficult to try to juggle two jobs at once. It’s very hard to replicate the benefits of being able to focus on something full time when you’ve got other things going on. That’s not to mention what else you’re sacrificing when you try to do two jobs at once—like friends, family, health, etc.
So, that’s the first test—do you need money to give this a shot?
Ok, so now you’ve decided that perhaps you can go a little bit on your own—or you can’t and you need to decide what you raise right out of the gate.
#2 Is there anything you can do in the first few months that really changes the story?
There are some companies that have no near term goals. You’re trying to build a solar-powered golf cart. You’ve done all the research already, you need $2mm to do the engineering, and there is simply no near term, MVP of this thing to be hacked up in 3-6 months on your own in your garage.
Then, I would suggest you skip the friends and family, or small pre-seed round. $250-500k simply won’t get you anywhere—and it’s all or nothing.
What’s especially important here is understanding where the story changes. I mean, sure, you can buy a golf cart and take the motor out—and you can buy some solar panels, but without getting them to work together, you really haven’t proven anything at all that would change the story 3-6 months in that would have made the story more compelling than it was on day one. On day one, you were still a team of however many people you had, and your market was what it was. Taking apart a golf cart and tinkering for three months wouldn’t have changed that pitch.
However, there might be some things that do change the story. This is where investor feedback from “friendlies” helps—or from a platform like Feedback.vc where you can anonymously get reviews from real investors on your current situation.
This might point you in the direction of raising “a little money” right off the bat to get started. This often looks like going to your closest professional contacts, friends that are professionals who could spare that check (please don’t have your parents take out a second mortgage or cash out their retirement), or to professional investors who specialize in early. While you might only wind up with just enough to go 3-6 months to get somewhere it often pays to go to VCs with pre-seed or seed funds like Brooklyn Bridge Ventures just to get their response. You might only be looking for $250k and still wind up with $1mm round to your own surprise.
So what do we mean “getting somewhere”? What kind of near term goals change the story?
Here’s how raising a small friends, family, and close professionals round can help your story in each sector:
Consumer - Even a clickable wireframe will go a long way to helping demonstrate whether or not you’ve got the right kind of product insight to generate that fickle consumer love. Very rarely do consumer products raise off of pitch decks alone. On a small budget, you might be able to get product samples, designs, and some light branding work (perhaps from a freelance creative director like Aja Singer). That’s going to give an investor a lot more to work with to understand where you’re going with a product than with just a basic pitch that there’s an opening in a particular market.
Prosumer - When people like me are the customer, you have someone who can start paying quickly with a corporate card because I value my time and do have a budget for things. However, the problems are often solved already, even if poorly by others (or by me just using Google sheets) and you’re trying to be better than something else I’m already using. Prototypes and wireframes that are cobbled together with small, initial rounds can go a long way in proving that you’ve got novel insight either into the solution or a more clever onboarding or acquisition strategy that makes it easy for people to switch or get going with you.
SMB - Selling at scale is the key to this sector. Unlike enterprise, where some big bank CIO definitely buys products like yours, no one at Uncle Tony’s Pizzeria is in charge of buying tech. You’re lucky if Uncle Tony even picks up the phone while he’s spinning pies. Small businesses require a spinning flywheel that is cost-effective, so if you can prove out selling early, you’ve changed your story.
Enterprise - The nice thing about enterprise is that they don’t really need something to be super polished because solving their big problems saves them a lot of money and time. The sooner you can help them when you’re solving the right problem, the better—and even a small order for them can be enough to fund you for a few months. Getting in the door at an enterprise can help change an early story.
Deep tech - With deep tech, small amounts of money usually means hiring, and the early bets can involve a team, a problem, and a very basic prototype that shows something promising. A few hundred grand might get two or three of the smartest people you know locked in a room long enough to build some crude magic and that might be better than just a powerpoint where no one knows if it’s ever going to come close to working.
If any of these seem like potential outcomes that make future fundraising for bigger dollars easier, it might very well be worth putting some money in the bank sooner rather than later.
#3 Is your story better or worse with some money? Are you sure?
The “Are you sure?” part is the key question you need to ask yourself—and it’s where a lot of people slip up. Have you ever heard the expression, “Nothing like numbers to ruin a good story?” There are lots of times founders feel like they’re better off having something to show vs nothing and that’s just not always the case—especially when what you could wind up showing are any of the following:
A build of the wrong set of features with no budget leftover to iterate.
A slowly growing business, hobbled by a lack of marketing budget or a marketing team, where the biggest question in the first place was whether customers really want this thing.
A business that is up and running, but only doing something that is essentially a commodity, where the hard part is something yet to be proven and the thing you’re already doing doesn’t really say anything about your potential awesomeness.
All of these things are worse than just a powerpoint, because they distract from your main message of the big idea. It makes people look at numbers and traction for a thing that isn’t the thing you’re really trying to pitch. It gives investors one data point: You as a founder may not be good at making the most of a small budget and figuring out which aspects of a problem to solve to get the biggest bang for the buck.
It comes from a good place—the desire to have something versus nothing is admirable, but not always effective.
#4 What’s the potential size of the outcome?
You should only raise capital when you think there’s a big outcome—because otherwise, it may not pay to take the ownership dilution. Flipping something for $5mm vs raising $12mm across a pre-seed, seed and Series A round only to sell for $20mm may actually wind up netting you identical amounts, for far different amounts of hassle along the way.
#5 Can you stomach a failure?
Raising money at all means you’re going to ramp up the risk in order to have a shot at something bigger. It also means you’re going to create overhead through hiring and other line items that increase the chances that the company won’t be able to pay for itself one day. If you’re not ready to face that potential future situation, don’t seek outside capital at all.
#6 Do you know this is a thing? I mean, really know… because you did the homework.
Some founders raise $2mm right out of the gate on just a PowerPoint.
How?
They convince VCs of the following:
There’s no small version.
There’s definitely a market here—I don’t need to prove it.
We’re the uniquely right team—as opposed to just a team of very nice, smart, hardworking people. In NYC, I can throw a rock and hit that any day of the week.
The reality is that there are very few people who set out to build a thing that fail to build the thing. They might not be able to scale it, nobody may want it, but just getting a thing built in some version isn’t that hard. The pre-product risk that you might not even be able to get to a product is overstated. Things can be built—and that’s why so many VCs back founders before they have users when they are confident those founders are building the right thing given the right insight.
The key is being about to show your homework, and the homework is your years of market observation and your demonstrated insight. VCs want to leave a meeting feeling schooled on what a customer seeks and why you’ve got the right thing.
Too many founders come in trying to prove that they deserve to be sitting in the meeting, or that solving the problem is valuable—when what they really need to do is wow with their insight.
Don’t tell me you’re a team of engineers or the size of the pumpkin launching contest industry. Share with me your opinions on trebuchet vs air cannon.
If you’re thinking of doing something early in NYC, come chat.
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This post originally appeared in my blog here. I’m trying to figure out what combination of mediums and subscription methodology creates the most engagement and reach. Open to your ideas!
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