Category: Bootstrapping

Startup Funding: The FIRST option should always be doing it on your own

Startup Funding: The FIRST option should always be doing it on your own

Peter Cauton

I’ve been blessed to have talked to a growing number of young entrepreneurs over the past few months. One common concern for the would-be-startup-owner is funding. How do you get the funding to start?

The two general answers are bootstrapping and raising investment money.

There are other interesting fund-raising strategies arising, like crowdsourcing, but that’s a topic for another post

Before I give my bootstrap-biased opinion on this, let me give the easy answer first, which is: it depends on the idea. 

THE EASY ANSWER:

Generally, you can look at the following things when determining which path to take:

1. Do you need a huge capital investment to break even?

2. How big is the market and how fast will it develop?

3. How strong are the barriers to entry?

Capital Requirements

This is a bit obvious. If your idea plans to generate a huge sum of money, but needs, say, P20 million in initial capital to start, then you probably need funding. If you are making a significant play on retail and do not have generous family members or friends, then you probably would need funding. This is why technology firms are so  attractive – a mere ten years ago would need millions to set up an internet firm. Nowadays, the costs are becoming almost negligible. If you do not need a large sum to start, bootstrap.

Market Size and Growth

If you are planning to immediately take on a huge market, or a market which will grow really, really fast, then you probably need to acquire funding. Capturing a sizeable market requires investment (usually for marketing and sales). Witness Serenitea. They were the first milk tea place of its kind in the country (as far as I know). When competitors started appearing left and right, they suddenly had to put up a lot of sites (and invest in new technology, like those circular buzzers) to defend their position. Putting up those sites required funding.

Barriers to Entry

If your idea has low capital requirements to get started AND has the potential to be a big business, then it will boil down to barriers to entry. If your idea is NOT defensible (an individual with deep pockets can set up a competitor really fast), then it is advisable to acquire funding to capture market share immediately and seize the opportunity. If there is little chance for a competitor to beat you to scale because you are doing something really unique, or IP, then it might be best to bootstrap.

The guidelines above can be considered as general guidelines for figuring out how to finance your startup. Here’s my opinion though:

MY OPINION: As much as you can, always bootstrap. 

Short story.

Early this year we had an idea which, according to the guidelines above, was much better suited for funding than bootstrapping. So my team went around fundraising for P4-5 million. Established venture capital firms found the idea a bit too small to fund.

note: venture capital firms raise millions of dollars of funding for startups – but they can’t spread themselves too thin by spreading it out to too many small opportunities, they’d rather select few, bigger opportunities which have the potential multiplying their investment 10x, or even more, in 4-5 years

We then tried to go after Angels and other investment houses. Basically, we were trying to sell 20% of the firm for around P4 million of funding, at a P20 million company valuation. This was a typical way startups in the US did it, according to my extensive review of the literature.

Here’s the typical response:

“Idea sounds great, but if we are taking on the entire risk, then we would require 60%-80% of your firm.”

After getting the same quote from a good number of investors, we figured it was just a bit different here than what US literature suggests.

A team of bootstrappers, there was NO WAY we would have been amenable to those terms. So we regrouped, re-calculated our figures, tightened our belts, and basically, innovated. This new firm will now be launched within a month.

Here’s three reasons why you should try bootstrapping first before resorting to funding:

a) You are forced to be more creative

Spending your own, hard-earned cash will force you to have an augmented sense of fiscal responsibility, create a deep sense of urgency, and will make you exhaust all possibilities for solutions. Sounds like the ingredients necessary for a successful startup.

Spending other people’s money is very much akin to how most of us manage our credit cards – poorly.

b) You will have more power on the negotiating table

Once you generate traction (your business starts making money), then it is but logical that you will find yourself with more leverage on the negotiating table, in the event you want to seek investor money to finance further growth. If you have shown NO PROOF that your idea can work and you need money, then that 80% equity request will seem to be logical from the point of view of the one shelling all the cash out. Oh, and investors won’t treat surveys nor “research findings” as traction. You have to show money to show you are making money.

c) We often over-estimate market size, market growth, and competition

A number of the pitches I’ve seen reflect eye-popping numbers when it comes to market size and growth. Bluntly speaking, these are just guesses – and more often than not, the numbers will prove to be more earth-bound. More earth-bound numbers lessen the actual need for funding (in accordance to the general guidelines above).

Competition is also typically exaggerated. (Once people get a hold of this idea, it will spread like wildfire! So we have to act now!) After years of listening to ideas, I’ve yet to see an idea “spread like wildfire.” After all, it’s really in the execution.

Instead of market guesses, the best thing to do is to build an actual low-cost MVP, try to sell it, and gain traction.

In other words, bootstrap.

d) Why hire a captain of your own ship?

One HUGE reason I went the entrepreneur route was freedom. I wanted to be my own boss. If someone else buys 60% of your firm, then guess what?

You aren’t the captain anymore.

e) Raising funds is distracting

The first order of business when you have a startup is taking care of the product. You have to learn more about it, talk to potential and current customers, iterate, strategize, create. In raising funds, it’s easy to get distracted about the allure of raising millions for your startup. Then there’s all the “due-diligence” you need to work on, meetings to attend, figuring out the numbers. This can become a real attention grabber, keeping you from focusing on what is truly important.

The ONE Thing To Focus On When You Start Your Company

Peter Cauton

We are smart people. So before we started our startup, we thoroughly thought about our business strategy . Perhaps we drafted a comprehensive business plan which outlined our specific market and how to leverage our competitive advantages.

Armed with our plan, we started. We marketed and began selling. We talked to our customers.

Here is where it always gets interesting. When we offer our product, a lot of times, the consumer will ask us for something else. Another way to use our product. An altered product, perhaps. Or a service related to what we are offering, but not exactly what we are offering. When I was selling our HR technology products in our startup STORM, I was asked several times by HR Directors about whether we did executive search. I always thought it was a good thing that I kept on saying no.

Since we are smart, we would probably invoke Steve Jobs and think about his “Focus is saying no” mantra. You might be tempted to say no and say “the money’s good , but this will be a distraction.”

Let me give you one piece of advice:

Do the service. Bend over backward a bit. Then take the money.

When you begin startup operations, there should be one thing that should consume you above everything else: SURVIVAL. A lot of us have grand plans and we dream of raking in the dough the moment we start. Then we do start and the dual-reality hits us: it’s hard to get customers to open up their wallets and costs are higher than we expected. The dream then transforms into a (necessary) desperation.

Most startups kick the bucket in 5 years. 99% of them do so because they didn’t have enough cash to sustain operations. Cash is king.

As CEO, would you rather deal with a profitable company dealing with lack of focus, or a “strategic” company going under? Thought so.

Beggars aren’t choosers. Startups are essentially beggars. So take whatever money that you can to survive.

Saying no to focus is crucial, but it normally comes after a few years when your startup more or less has created an identity and is a bit more financially stable.

Cash allows your startup to be flexible. Cash will give you leverage – and time – to solve problems. Lack of cash is the opposite – it is a death sentence.

For startups, survival is success. If your startup idea is a good one, I guarantee you this: as long as you survive those critical first few years, IT WILL GET BETTER. But until it does, you have to hang in there and just concentrate keep your head above water. This means saying yes to any and every monetary opportunity available, as long as you don’t veer so much from your main vision ( a judgment call). Keep your head above water – there is nothing more crucial than this when you start. Eliminate luxuries, create an ultra-conscious culture to keep costs low, and maximize every earning opportunity.

The mind-blowing thing is, that “extra” thing that you were asked to do might be the bigger business opportunity than your original plan. Paypal started out as a Palm Pilot electronic wallet idea. The had an online emulator which did payments online, and at first, they were ignoring the sudden rush of people which wanted to do online payments. Then it finally hit them in the head that they were inadvertently sitting on a goldmine.

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6 Tips for Developing a Startup Without Quitting Your Day Job, Part 2

Peter Cauton

(This is the second post in a two-part series. Part one can be found here.)

Here are three more crucial tips in getting your startup to work while maintaining a day job.

4) Organize a STARTUP POWER WEEK

I got this idea from my friend Elmer, who  works fulltime in a service firm and manages to have time for a couple of startups. What I’ve seen Elmer do TWICE already is to plan and execute a STARTUP POWER WEEK.

Here are the steps:

a) Take a 5-day Vacation Leave 2-3 months in advance.

Of course, a vacation is the LAST THING on Elmer’s mind, in fact the opposite is more appropriate. The nine days he will free up is the startup equivalent of what Santa Claus does on Christmas Eve – Elmer will be delivering an insane number of items.

b) Arrange and Schedule EVERYTHING on these 9 days.

Think of the work you CAN’T do during your spare time, the work that can only be done during official work hours. These might include: face-to-face selling to a huge client, talking to a big supplier, or market research. Call a ton of people. Get them to commit to dates and times. Cram the 9-days with every strategic item you can get to work on. Yep, work the nights as well for crucial interviews or coffee talks.

Why don’t you just spread the leaves out instead of doing it all in a week? For Elmer, he HAS to do it this way because he works in the US and his startups are local – so he TRAVELS here during the nine-days. He can’t spread ’em. But there is another reason you might want to consider: momentum. I’ve SEEN first hand how Elmer makes these power weeks work – they are EXTRA productive for him.

During this one week, you will NOT be distracted by your day-job requirements (well, hopefully). During this one week, you can go into a deep dive. You can be totally immersed and it can be exhilarating – you get a a week’s feel of the startup life. At the end of the week, great momentum is created which can’t help but get carried over the succeeding ones. Momentum is everything.  

c) During and preceding these 9-days, take plenty of vitamins (oh wow, getting hit by the bug here would be such a choke-job).

5) Find Passionate Co-founders

First order of business: find a passionate, FULLTIME co-founder. There is a MUCH greater chance for your startup to succeed if SOMEONE is fulltime, preferably that someone who will do a bit of sales, marketing, or business development. Can you imagine doing sales for your startup while having an 8-5 job? (think about that for a moment)

I’ve done that. I’ve had to cancel meetings with my startup AN HOUR before the scheduled time because my boss just wanted to talk to me. Quite tough to operate this way.

I’ve now started quite a few startups – some have failed, some have succeeded. What do all the successes have in common? Each of the successes had a fulltime partner. I can’t over-emphasize how crucial this is.

Note: you can HIRE for this full-time need and pay an employee to do it. However, one big factor I’ve discovered is: if you have a fulltime job, you”ll only have a limited time supervising and leading an employee. There is a GREAT chance that not only will your employee end up being unproductive, but demotivated as well. A co-partner, on the other hand, will have equity in the firm. The equity will likely make him much more invested and motivated in building the firm – especially if you aren’t around most of the time.

6) Respect Your Current Employer

Under no circumstances must you compromise your integrity by compromising the interests of your current employer. None.

As tempting as it may sound, you mustn’t allow yourself to do your startup work during official working hours, or compromise the quality of your work in any way because you were too distracted with a startup-related project.

There are practical reasons for this: getting caught (and fired), ruining your reputation (which is crucial when you start selling stuff in your startup), the company confiscating your startup work (whatever is saved in your company laptop DOES NOT belong to you),  and others.

But I think it can boil down to one thing: the golden rule.

Plus, karma’s a bitch.

Do check out this related post about planning carefully for the startup runway.

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6 Tips for Developing a Startup Without Quitting Your Day Job, Part 1

Peter Cauton

For a lot of us, taking an immediate startup leap can be a daunting task – as much as possible, we want to remain practical and mitigate risk. Before diving in, we want to ensure that the startup can sustain our family’s needs.

Fortunately, it IS possible to create a startup while holding on to your day job. Again, the definition of what a startup is crucial here. While I find that it is possible to START a startup on a part-time basis, I would argue that it is impossible to SIGNIFICANTLY GROW one while being attached to a day job.

Take note that we are talking about startups here. It is entirely doable to pull off creating a small business like a food stand franchise or an internet cafe while never leaving your day job. A true startup, however, is a different matter.

If you are planning to create a significant startup, you already need to think of your current day job as temporary. 

You have decide that when your startup reaches a certain milestone, you will need to jump in. No startup can live and grow to its fullest potential if the founder doesn’t treat it as its number one professional priority.

(Think of all the great startups you know. All of them had founders who gave their ALL)

But starting a startup? Entirely possible. I went through this route myself. Here are some insights from that experience.

1) Take a Deep Breath

If you want to build something that is truly of value WHILE you have an 8 to 5 job, then you have to accept that it will take sacrifice. Something WILL give because there are only 24 hours in a single day. Whether be it sleep, or time with loved ones and friends, or the time you spend on your hobbies – something will have to be sacrificed.

It might be time to have a good talk with people around you who will be affected, not merely so they will understand, but also to help you garner much-needed support.

Take a deep breath. Understand what you are taking on. Pray. Then start.

2) Maximize startup work time

Here are some suggestions:

a) Work through lunch. I would eat my lunch on my table and work through the whole hour – typing up proposals, creating copy, pushing numbers. Sometimes we would schedule interviews during these breaks in a nearby coffee shop. That’s 5 hours a week right there.

b) Do not make traffic a factor. Hang out in the cafeteria and work until traffic subsides.

c) If possible, move to a place near your work. When my first startup STORM incorporated, I decidedly moved into a condominium just beside Tektite Ortigas where my day job was. That condo eventually became the first STORM office, creating a ton of strategic efficiencies.

d) Get another day job. If your current job makes you work like a dog for 14 hours a day – quit that job and find something with better work-life balance. It is IMPOSSIBLE to do something else if the job requires that many hours from you day-in and day-out. Again if doing a startup is your main goal, you have to look at your current job as a stepping stone. If your current job isn’t helping you towards your ultimate goal, just quit. Find another job.

3) Conserve Salary

One thing you will quickly notice when you begin working for your startup is that the actual expenses are always much greater than your projections. Some startup resources actually tell you to expect double. Turns out you’re using more paper, or more ink, or that you need an intern to do research, or the old PC you borrowed for operations breaks down, or your electricity costs soar during the summer. So where will you get the money to pay for these expenses?

This is one advantage of starting while working part-time. Instead of draining a limited “war-chest” or raising more money, you can perhaps bank on your salary. Frugal living then becomes a must, as it can feel like you added a new baby to your family.

Click here to continue onto part 2! Next three tips include arranging a “Startup Mega-Production Week.”

(Know anyone you think just NEEDS to hear the content of Juangreatleap? Be a blessing and share NOW!)

REPOST STICKY: 6 Tips for Developing a Startup Without Quitting Your Day Job, Part 1

Peter Cauton

For a lot of us, taking an immediate startup leap can be a daunting task – as much as possible, we want to remain practical and mitigate risk. Before diving in, we want to ensure that the startup can sustain our family’s needs.

Fortunately, it IS possible to create a startup while holding on to your day job. Again, the definition of what a startup is crucial here. While I find that it is possible to START a startup on a part-time basis, I would argue that it is impossible to SIGNIFICANTLY GROW one while being attached to a day job.

Take note that we are talking about startups here. It is entirely doable to pull off creating a small business like a food stand franchise or an internet cafe while never leaving your day job. A true startup, however, is a different matter.

If you are planning to create a significant startup, you already need to think of your current day job as temporary. 

You have decide that when your startup reaches a certain milestone, you will need to jump in. No startup can live and grow to its fullest potential if the founder doesn’t treat it as its number one professional priority.

(Think of all the great startups you know. All of them had founders who gave their ALL)

But starting a startup? Entirely possible. I went through this route myself. Here are some insights from that experience.

1) Take a Deep Breath

If you want to build something that is truly of value WHILE you have an 8 to 5 job, then you have to accept that it will take sacrifice. Something WILL give because there are only 24 hours in a single day. Whether be it sleep, or time with loved ones and friends, or the time you spend on your hobbies – something will have to be sacrificed.

It might be time to have a good talk with people around you who will be affected, not merely so they will understand, but also to help you garner much-needed support.

Take a deep breath. Understand what you are taking on. Pray. Then start.

2) Maximize startup work time

Here are some suggestions:

a) Work through lunch. I would eat my lunch on my table and work through the whole hour – typing up proposals, creating copy, pushing numbers. Sometimes we would schedule interviews during these breaks in a nearby coffee shop. That’s 5 hours a week right there.

b) Do not make traffic a factor. Hang out in the cafeteria and work until traffic subsides.

c) If possible, move to a place near your work. When my first startup STORM incorporated, I decidedly moved into a condominium just beside Tektite Ortigas where my day job was. That condo eventually became the first STORM office, creating a ton of strategic efficiencies.

d) Get another day job. If your current job makes you work like a dog for 14 hours a day – quit that job and find something with better work-life balance. It is IMPOSSIBLE to do something else if the job requires that many hours from you day-in and day-out. Again if doing a startup is your main goal, you have to look at your current job as a stepping stone. If your current job isn’t helping you towards your ultimate goal, just quit. Find another job.

3) Conserve Salary

One thing you will quickly notice when you begin working for your startup is that the actual expenses are always much greater than your projections. Some startup resources actually tell you to expect double. Turns out you’re using more paper, or more ink, or that you need an intern to do research, or the old PC you borrowed for operations breaks down, or your electricity costs soar during the summer. So where will you get the money to pay for these expenses?

This is one advantage of starting while working part-time. Instead of draining a limited “war-chest” or raising more money, you can perhaps bank on your salary. Frugal living then becomes a must, as it can feel like you added a new baby to your family.

Click here to continue onto part 2! Next three tips include arranging a “Startup Mega-Production Week.”

(Know anyone you think just NEEDS to hear the content of Juangreatleap? Be a blessing and share NOW!)

Buhay Bootstrap (plus, free startup glossary!)

Peter Cauton

The year is 2006. Pao and I were about 15-20 pounds lighter. Pao was still enjoying his mullet haircut, while I was still enjoying some hair.We wanted to put up a flexible benefits solutions firm, capitalizing on my own early-market experience with flexible benefits.

None of us were really “entrepreneurs” when we started. I was an HR guy and Pao was a programmer. We tried pitching to investors for startup capital, but I think this failed for two reasons: a) the mammoth 100+ page business plan (AKA complete waste of time) we crafted, and b) at that time, no one understood what our idea was and could become. So we ended up bootstrapping.

Funding. There are two general ways to fund a firm: a) raising capital from investors, or b) bootstrapping. Bootstrapping basically means getting no outside funds. The founders themselves would put up the initial capital (another common ploy would be credit cards, although nowadays there seem to be no end to spammed loan offers), minimize costs by all means necessary, survive, and wait for the business to break even and eventually, be profitable. What you give up when you get funding from investors is equity – and thereby control. When you bootstrap though, and it works – you retain control.

We put in around 90K all in all and got started. Pao actually took the leap much earlier than I did. In a crucial move, he went full-time in STORM immediately. I worked with him part-time. To minimize costs, the company began operating in the living room of my 1-bedroom condo. The bedroom effectively became my house. (When I stepped out of the door – boom, I was at work!) We didn’t pay for any office furniture – everything was something someone had donated, so uhm … it wasn’t exactly a breathtaking sight. Our monthly costs were Pao’s salary (near minimum), electricity, and the cheapest internet provider at that time – Destiny (don’t get me started). We felt like we could manage the burn and survive until we got a client or two.

Burn rate is a synonymous term for negative cash flow. It is a measure for how fast a company will use up its initial shareholder capital. If shareholder capital is exhausted, the company will either have to start making a profit, find additional funding, or close down. (wikipedia)

Our plan: to make money from flexible benefits consulting first, and then eventually use the funds to develop an online flexible benefits system to market. Game.

Excited, we planned out a half-day seminar on flexible benefits in Discovery Suites.  Then we started calling people to come. The event was jam-packed, filled with a lot of large firms. Peso signs started broadcasting out of our eyes and stuff. We we’re Kings of the World!

Until we talked to them.

None of them wanted merely consulting. They wanted the online system.

Hokay. This was a significant problem. We had wanted a kick-ass online system. We had previously developed the specs and we designed the data flow very carefully, capturing the various nuances of a comprehensive flexible benefits program. The resulting design was a gargantuan task which would take months to develop for a team. On pao’s salary alone we had 2-3 months of burn left. So what to do?

This led to our first pivot.

Pivot: this is when, due to new insights gathered from the market a firm does a quick turn, a quick strategy change, WITHOUT changing the overall vision of the firm

We needed small, quick wins to allows to raise funds to hire one more programmer to help Pao finish our system as fast as possible. Prior to this time, I had conducted an organizational climate survey for a friend’s organization – and thought that might be a cool service. However, there were a large number of competitors in the business, so we thought an online web survey tool (there wasn’t a popular one at that time) could make us unique in this market.

Amazingly, Pao did the tool in a month, we dubbed it WebSurv. (we still use it now for some projects) Websurv helped STORM land its first few projects – analyze/report projects for some medium-sized firms.

We eventually got to hire our first employee, Angela (who, during her initial interview, took fifteen minutes waiting just outside the door of my residential condo unit before finally mustering the courage to knock). This set the stage for everything. We finished the flexible benefits system before the year ended, managed to land two major flexible benefits clients as 2007 started, and the rest is company history.

In six years, STORM has manage to become a bona-fide player in the local HR technology market, with its sights set abroad.

Some items to takeaway:

1) No, it’s not as glamorous as you might think. (not at all!) It takes a whole lot of sacrifice and humility.

2) It really helps to have a partner with you to weather the storms (pun intended).

3) It’s mighty tough to get investor money (a bit easier nowadays though). Bootstrapping is entirely possible though and has a lot of upside. Check this out. I’m a big believer.

4)  Your plan has to be really be very very flexible to changes.

5) It can take a long time – so patience and perseverance are paramount.