Browse the homepage of any tech reporting website and you will learn that private tech companies are headline junkies. This should be no surprise given the sky high valuations of 2015, record-high seed funding, and Series A/B/C rounds mimicking IPO cash injections. All of the hype around who’s funded whom seems as if we’re now focusing on the ability to raise money rather than the ability to earn money. Where will that leave us in 10 years?
Do a google search with keywords “raises funding” or better yet, put a specific amount in there, say $50 million. Fivestars, Handy, FreedomPop, Gusto, and a few other companies, eerily reminiscent of boyband names, pop up. All of these companies have one thing in common: they believe that debt in the form of venture capital is the best way for them to win.
And let me be clear: venture capital IS debt. If you don’t think so, try not paying it back. Here’s a simple explanation of how it works: you agree on certain terms, and assuming you make money, your investors will get their capital back, plus, a nice return. Due to the inherent risk of business, your investor will get a negotiable amount of ownership in your business. If you achieve the magical moment known as a liquidity event, you will pay your investor a sum according to his or her ownership.
The alternative option is to grow a business without outside financing. You accomplish this by selling your product to customers for more than it costs you to deliver it, resulting in a profit. Take these profits, pour them into delighting customers and acquiring new ones, and you’ll grow. This is called bootstrapping, and these days, other than an occasional Jason Fried post, you rarely if ever read about it. Is growing year over year to a multimillion dollar company not as newsworthy as raising millions in one round?
When you choose to make your money versus raise your money:
- You determine your identity. When you don’t take money, no one tells you what to do. YOU choose what product ships and when, the suppliers and vendors you deal with, and the people you hire. The result is that the company you build is based on internal values you define.
- You minimize waste. When the only money you have is the money you have earned, you hate to waste it. You streamline your business around what matters most, constantly determining what is working and what is not as a means of survival. You learn to compete in ways that require a fraction of the customer acquisition cost of your competitors. You hire excellent people because you cannot afford lazy ones, and you treat them well because you don’t want them to leave because you know it’s worth investing time in people versus staring over. Startups use buzzwords like lean, agile, or hustle to describe this mentality. Bootstrapped companies like ourselves call this normal—this is how we’ve always paid the bills.
- You maximize customer value. When your customer is the sole source of finance, you listen to them when they speak. You give them respect. You do your best to delight them. Your customers are the reason you are in business. They keep your lights on and allow you to reward employees for their hard work. Oddly enough, it all comes full circle: happy employees equal happy customers, which equals organic company growth. After all, your customers are the reason you exist, not the last round of financing you raised.
Bottom line: the problem is not raising money. The problem comes when your company identity and core values are no longer in your control.