To my good fortune one of the insights I received early on in business was that good decisions are worth a lot more than capital.
I’ve been doing a few speaking engagements lately at TiE, Pushstart FinTec, Uni of Sydney and attending a few tech events for startups such as Sydstart and at Fishburners. What I’ve observed talking to people at some of these events is an obsession with Angel and Venture Capital being the only funding source worth considering.
While I don’t want to squash enthusiasm for these as valid funding sources there are other financial funding models a startup can consider to get capital or more precisely resources. They can worry about VC’s later when the startup is maturing and is much more likely to meet VC investment criteria hurdles.
The first reality check is that Angels much prefer you to have a few customers or at least some IP built that their instinct tells them will start to generate revenue in the near term. An idea is simply too early. It’s a myth to think Angels will invest in purely an idea. They might but it’s rare unless you already have patents or a really fantastic barrier to entry.
VC’s are a much more difficult proposition for new startups. Actually borderline impossible unless your technology is in the 99.9 percentile of extreme bleeding edge ideas to the max! Even beyond this it must sing overnight success every time someone looks at it. Typically they want you to be at a minimum revenue target before engaging. This is often 500k or more recently 1mio USD revenue equivalent. Most startups attempt to engage VC’s way too early. Ironically most startups go to Angels too late in my experience.
Let’s firstly redefine capital raising
Capital raising is reaction to needing resource, sometimes it’s an avoidance of change of use of existing resources or the worst kind is because “that’s what I thought startups did?”. I call this last kind a CRAPital raising. First switch your understanding toward what you really need, resources. Don’t obsess on one proxy for resource being cash.
Startups should consider that it IS possible to build very large companies without any big investors coming on board. It’s also possible to gather human capital to build and sell in lieu off buying this resource. Swapping equity for time/resource, channel partners, social media and ecosystem activity such as events and meetups are an easy low cost way. In particular note here is ecosystems. Saasu-ians attend a lot of events. We don’t go to sell but we do meet lots of people and we know lots of sales happen as a result in a natural way. It’s not the reason we go but it is a great side effect seeing sales occur as a result.
Accelerators and Incubators are another low equity/dollar cost activity you can look at to share resources in an ecosystem. Saasu provides free licences under our Saasu Futures Program if you are in an approved Incubator or Accelerator.
Lastly consider that investors are looking for really good decision makers to invest in. The management team is something VC’s rate highest. S&P and Moodys do the same in their analysis of companies at the listed entity level. Traders/investors look at it when buying and investing. People are really what companies are made of. Without people they are static legal and tax entities with static unrealised IP. People are the secret sauce. If as an investor I own companies full of A+ teams (as opposed to products or ideas) then it’s likely I will see great returns.
The product or service is often secondary to the team except where they love the product and don’t like you or your team. The investors will have an exit already planned for you if they think they can get control and do it better themselves. Yes they want to invest in the right genre of product but the team will be a priority in their decision making process.
Too many startups think it’s the idea. Ideas are actually pretty worthless without it’s natural blood brother execution. Execution, being a combination of decision making and activity, is a key behaviour that look at in their investment criteria and modelling.
Let’s pretend you can operate at 100% effectiveness you will grow very quickly without capital and actually end up naturally attracting capital. You will not need to seek it. Offers will come thick and fast for your business from competitors, VC’s and customers! This may take time but if you are effective it will happen.
You can never spend too much time thinking and making good decisions
Let’s look at decision making. One of the early tricks I learned while being a trader was to view decision making as a probability phenomena. Decisions are like options. Options are the right to do something once an event occurs. You pay a small premium to do this. Insurance is a good example of an option. You have the right to claim when an event occurs. You paid a premium for this right. Decisions are the same except the event is the result of your decision. You get a result good or bad and you pay a premium. The cost to act out on that decision, the cost to execute.
Don’t forget that nature applies to business
Decision optionality is just another form of Complexity Science. Nature and more specifically evolution of humankind beyond the organic is full of complex systems. Complexity in decisions is not unlike the complexities in genetics and other selective systems influenced by probability.
In this diagram, which is an extract from Charles Darwin, On The Origin of the Species, you will see that the tree diagram branches out to the right. If in business you consistently make good decisions you are on that branch. Bad decisions end by veering left and terminating in some cases. So the point I’m really trying to make here is that decisions that are consistently well made will tend to cause amazing results and thus are MUCH more valuable than early stage capital raising.
Spending time in thinking, discovering, testing without spending to much money trying to “muscle a result” by obsessing on capital raising will swing the probabilities in your favour. Use probability to your advantage.
Don’t underestimate how important data is in making these decisions. Don’t underestimate how early you need to fire yourself as the founder from doing the work and moving entirely into thinking, strategy and planning. The only other hat apart from these a founder or CEO should wear are part-time PR or bleeding edge R&D hats. I personally spent too long doing the work in Saasu. A little of this is because I was in an organic growth model but being honest with myself it wasn’t wanting to lesson my personal relationship time with customers and partners. I still have and greatly value these but have had to pull back for the sake of the business and all the new customers coming on board.
New business spend hundreds of hours attempting to seduce investors but you do have a choice. You can spend hundreds of hours working out how to get free resource or swap your time with people in your ecosystem. You can find ways to do things in a less expensive and ironically less stressful way than always trying to find the next dollars to pay the bills. It’s your decisions that determine your success. It isn’t about the dollars you raise. I’m realistic dollars definitely help, get some dollars if you can but assess the cost of getting those dollars versus the alternate approaches I’ve talked about above.
You make your luck so go out there and make some luck!