Start-Up Advice: Digital4s Ventures on Financing Your Startup – Bootstrap vs VC investment?

A few weeks ago I was asked to participate in the Meetup panel at Techbeach Manly discussing the question of Bootstrap vs VC financing of your start-up. Here are a few of my panel comments and recommendations to the Techbeach audience.

Of course the answer is – it depends … on the offering, competition and earlier experience, to mention a few factors! However, consider the following…

Due to the lower costs needed to build/create, launch and scale companies today you can bootstrap (use minimal financial resources) for longer than just a few years ago. Technology development is cheap and access to 3 billion global internet users is one click away.

I suggest that 20% of online success is dependent on product/technology and 80% on smart digital and performance marketing. Time to market is also increasingly crucial.

So, is it more important to quickly obtain external financing today than a few years ago? Yes, I certainly think so – especially if you think big.

Sweat equity is the first form of equity you should consider. Find great people who are willing to offer their time, expertise and hard work in return for equity. Make sure to bring on board technical, marketing and domain expertise as co-founders, or at least as sizeable shareholders.

This builds credibility. It’s unlikely you have it all. However, if you are serious about scaling up, sooner or later you need to bring on external financing beside sweat equity, ‘fools, family and friends’. When you do, make sure your start-up is ready.

Raise capital when you don’t need it as this makes you stronger. However before even considering VC investments, prove your success and achieve important milestones in the initial phase. Again, speed is fundamental, so don’t drag along with market research into how your product fits into the market, even test sell your product before it’s been developed.

Make sure to set things up professionally (prototypes/betas, patents, accounting, legal, team, revenue model, attractive market, investment memo, one page teaser…) demonstrating solid enough structures to convince VCs. As soon as this is achieved I recommend going for external financing.

However, don’t be overly aggressive with how much cash you need. .As you get interest/offers, negotiate hard but don’t be unrealistic or foolish about value, $ and percentage. Act on it and transact! I have seen too many ‘let’s wait and see’ and ‘maybe we can get more’ approaches. Don’t be too greedy and wait too long. In the end, a few percent will not make any difference.

If you don’t bring in VC, the evaluation of your company might be discounted at later stages. They bring credibility and therefore value to your business. VC’s -and more importantly smart capital – will also save you lots of valuable time.

Their input provides inspiration and knowledge that might change your direction, strategies and execution. It will speed up time to success, or for that matter, failure. In either case you are a winner.

So when raising capital, learn about valuation. The bigger the potential value of your idea/start-up, the more you will need VC.

  • For example, if you can credibly prove you have a business case with $50 million revenue over four years, I suggest you start VC discussions now.
  • Also, be prepared to discuss exit paths with your potential investors, even though you need to show your long-term commitment.

Investors want to have an idea of your vision and exit potential, even though track record thus far is just as important to prove your idea and ability to build/drive a business.

To increase your valuation consider if and how your start-up has international potential. You’d better make it credible – investors have seen too many unrealistic valuations from inexperienced and over-optimistic entrepreneurs. (NB: If you have issues with valuation of the business in your negotiations, look at convertible notes as an alternative route to get going quickly).

When you decide to raise capital, focus on structuring a proper fundraising effort and not a dragged-out fund-seeking drive that take management attention off building the business. It’s not whether you go bootstrap or VC that will decide your business success or failure. It is more dependent of quality and prospect of your idea and your team’s commitment and hard work.

I urge Australia to step up in regards to start-up investments. We need to nourish innovation and create a new platform to grow the Australian economy and our employment base. Consider the following facts I picked up at CeBIT last week – Australia is spending $7 per capita on angel investments. The same number for the US is $105 per capita. Over just one day of Melbourne Cup, Australia is spending ~$9 per capita!

Innovation and start-ups are critical pillars of Australia’s long-term success, so let’s accelerate our start-up community ASAP!

Fredrik Orrenius
Founder Digital4s Ventures.
Fred on Linkedin