Tip: the end of the article outlines the GPDS framework to build your startup without investor funding
Shows like Shark Tank and Dragons’ Den are just two prime examples that depict an incorrect notion many founders have when it comes to growing their startups — that venture capital is king! While most of the show focuses on the race to get your brand noticed and funded, it does not truly show what happens when the investment doubloons start to roll in.
Venture Capital funding is much sought after by entrepreneurs and, of course, startup companies. Acquiring funding through VCs adds street credibility to any business while boosting its profile. It gives a sense that companies that are funded by venture capitalists are least likely to experience failure.
The worst thing a founder could do is to put too much importance and focus on giving the best pitch of their lives. When in truth, any successful brand will tell you how much more crucial it is to build your own assets first because investors should never be seen as the starting line to get the company moving forward.
The truth is that many firms that receive funding from venture capitalists have also been known to fail. The capital used to start and operate firms in their early stages can come from various other sources and yet many still run towards these investors.
Why is that?
Why Do Founders Turn to Venture Capitalists Anyway?
There are countless reasons why a startup owner would consider VC besides the obvious monetary gain.
Up and coming ventures would look into VCs since it is an amazing way to validate your idea and gain social evidence for future fundraising efforts. It can also create a sense of importance that could urge other investors and captivate angel investors to future funding attempts.
Subsequently, startup pitch deck campaigns for VCs are amazing PR tools that can catapult the visibility of any startup. It can generate a buzz to further build up a brand. But, is it truly worth it to look into a startup pitch deck?
What Are Pitch Decks?
A startup company typically prepares what the industry calls a “pitch deck”. Pitch decks typically comprise 15-20 slides in a presentation made in PowerPoint. The goal of a startup pitch deck is to properly showcase the company’s goods, services, technologies, strategies, and even the team to potential venture capital investors.
Generating investor capital is a time-consuming and challenging process. It’s not as easy as going on a TV show and sweet-talking the likes of Ashton Kutcher or Donald Trump. Pitching requires a well-articulated and compelling story along with a business plan that is as bulletproof as it gets.
Interestingly enough, the presence of investors can do more damage than good in the long run. Like those before them, many founders fall into the trap and hope with all their might to be the next appointed prodigy by an assembly of investors they considered to be gods. Sadly, this is not meant to last. Realistically, venture capitalists are not there to hold your hand every step of the way.
Top 10 Reasons to Say NO to Venture Capital
There has been no shortage of investor options today and age when social media success stories lead newborn founders to believe that VC is the only way to go. Even with founders quick to praise the immediate pattern recognition of a VC, the answers do not lie with them alone. A venture capitalist is not the marketplace, they do not represent any market, they aren’t even customers. Any funding an investor provides is meant to fuel, to contribute to the larger goal, which is to find the right customer and provide them the solutions they need. Any operating input investors provide a startup is not gospel truth.
That being said, here are the top10 reasons why you should forego an investor, at least for the time being:
1. You Lose Control
The minute you secure venture capital, you are in their clutches, it doesn’t matter if you can maintain a stake. Chances are you are giving up control, a percentage of the profits, and a percentage of the equity to a board that may have a different vision in mind for your company than you do.
In most instances, the VCs will demand for one or several seats at the board. This gives them leverage and the right to vote or turn down any key decisions that could affect the future of the brand directly. Lest you forget, this same board of investors also has the capacity to fire you or your team members, which means you can very well be removed from the company you have founded.
2. You Have Yet to Prove Your Market Need
Even if you have put together a startup pitch deck, financial projections, and a business plan — the simple fact of the matter is that they are still just projections. What you are doing is basing the success of your future and the company’s future on theoreticals.
Before considering venture capital, prove first that there are customers who are out there, ones who are interested in what you have to offer. Spend some time speaking to users and focusing on providing them with what they want. Wisely invest your time in finding the right spot in the market before making a pitch attempt to investors.
3: You Are More Focused on the Investors Than Your Customers
When you give up control, you gain a new responsibility. Your priority then shifts from your customer to whatever the investor dictates should come first. Anti-dilution protection, mandatory redemptions, liquidation preferences, dividends, and other similar founding partner perks may be among the conditions a venture capitalist may ask during the course of the negotiation.
In extreme cases, some VCs even have the right to sue you in the event that you neglect to disclose to them some “bad news.”
4. You Are Expending Energy on Raising Money When You Should Be Trying to Make It
One of the many ironies of venture capital is the amount of time an entrepreneur wastes chasing down potential investors. Especially when you could be out there chasing customers. There is after all only so much work in a day that you and your team can take on. And each minute spent chasing down an uninterested VC is a precious minute that could have gone into working on creating an amazing business.
Statistically, you are attempting to put all your eggs in one basket when this is a goal you will never obtain successfully.
5. High Burn Rates Lead To Failure
The amount by which your startup spends money is your burn rate. Venture capital is often looked at as a piggy bank leading to astronomical burn rates that are unsustainable. As you try to grow quickly, you begin throwing money to initiative left and right without a clear focus to get to next steps. Here’s 202 examples of startups that dug their own grave by getting funded too early.
6. You Become Disinterested in the Work Needed to Run a Business
It is easy to lose track of reality when it is someone else’s money you are playing with. It’s more difficult to be mindful of expenses when you appear to be well-funded. Twenty five to 50% of the businesses in the market are more than capable of running a tighter ship but they choose not to be scrappy until it is too late.
7. The End Goal Is Driven Towards an Exit Instead of Building a Long-Lasting Company
An endgame that is primarily growth over profit is highly likely to be stuck in an endless loop of having to generate more money. The moment you are unable to secure more from venture capitalists, the bigger likelihood of your company imploding.
Instead of building on a solid business model to turn profit and create repeat customers, you rely on the belief other people have in you and your theoretical projections.
8. You Really Do Not Need External or Additional Funding
It is a common misconception to accept financing even when you do not really need it. Someone may have mentioned that financing shouldn’t be turned down just because times are good for you and the company.
The thing is, there are many strings attached to venture capital. This type of funding does not come without consequences, nor is it really to the advantage of the entrepreneur, especially when you do not need it.
VC firms could end up dictating how and where the investment is to be spent. They could pressure you into taking your business in a direction you had no plans in taking it. They could even disagree with your ideas to the point of taking your business down.
If you can run your business without taking any venture capital, then keep doing just that. Before jumping into VC financing, a business loan may be worth considering first.
9. Competing Priorities Will Slow You Down
As the old adage goes: “too many cooks spoil the broth.” Thus, a dish can become unrecognizable when there are several different recipes. The only main goal of a venture capitalist is to generate continuous revenue streams. As an owner, however, you likely have other goals in mind. Your company that was born out of your cramped studio apartment may flourish faster than expected only because the primary agenda is to profit. There’s a chance you are urged to grow your brand, expand your office space, product line, or team even before you are ready.
A VC may also want the company to be acquired by a larger and well-established corporation who could, in turn, reinvent the startup, kick you out of the team, or completely dissolve it. If you happen to be lucky, you might even get compensated, but was it worth the price?
10. When Funding Is The Goal The Product Vision Suffers
Just like raising a newborn, your startup will require your undivided attention. Usually, the first two years are the most brutal. Besides working on protecting your product or service, you need to make other vital decisions such as forecasting, hiring, and marketing, to name a few examples.
Rather than pursuing funding from VC, you might be better off working on finding the right customer niche. Why would you focus on obtaining VC funding when you can just as easily create a customer base while generating profit?
Think about it, if your company can run on customers and revenue generation for funding, then go for that. A solid customer base keeps you in the driver’s seat.
The fundamental of any startup that has gone against the VC grain is to bootstrap. Bootstrap or bootstrapping is the practice of growing a business without the assistance of any external capital and operating on lean funding. The business operates through the cash flow it generates. With bootstrapping in place, it only makes sense to then expand on other sectors of the business.
Self-made entrepreneurs, also known as those who bootstrapped their way to business success, are quite the exotic species in the business industry. Again, they are a rare breed, but they do exist. For a business to successfully bring itself into fruition, it takes a lot of guts, risk-taking, determination, discipline, and a good dose of competitiveness.
Bootstrappers run with an idea and with professionalism and talent — they build a business that is worthwhile and without the backing from venture capitalists. It does take a lot of dedication, single-mindedness, and pure work ethics to be able to succeed in this manner. The process to self-sustain a business, to market it, and be able to scale it with the use of limited resources is clearly a feat to behold.
Lots of successful brands we know and love today have been products of bootstrapping. Take a look at this short list of companies that succeeded without the backing of venture capitalist and angel investors.
- Facebook Inc.
- Apple Inc.
- Coca Cola Co.
- Dell Computers
- Hewlett Packard
- Oracle Corp.
- Microsoft Corp.
- Ebay Inc.
- Oracle Corp.
- Clorox Co.
- Cisco Systems Inc.
Succeeding Without Venture Capital
For the sake of discussion, let’s say venture capital is no longer an option. You may likely be scratching your head and asking, “Now what?” Would it be possible to successfully grow a startup without funding from investors. And if so, how can this be done? The answer is simple, with investors out of the picture, your best alternative is the GPDS Method.
1. Grow a List
A thriving business that provides quality products with equally amazing services will eventually be able to gather a host of customers. This community of consumers that loyally support the business will allow you to get a better grasp of their needs and how your company can best provide solutions for it.
2. Presell a Mockup
It always pays to test the waters. Just like any other new business, a mockup, beta product, or trial phase would be beneficial for several reasons.
- Allows business owners to see any issues in the website before it is released to a larger market
- Prepares the team for after sales care
- Business is able to gather necessary feedback from the sample group of consumers
- Necessary tweaks and solutions can be set in place before its official release
- Less waste on building an actual product with many flaws or one that does not generate enough consumer interest
- Mockup preselling helps a brand determine who the exact target demographic is
- Help a startup figure out how much would the product or service really sell for or if the consumers are willing to pay at their given rate
- Lets the business implement additional protocols that were previously neglected
Once your mockup presell has generated all the pertinent info, you will need to implement this in order to create a product, service, and brand that is successful. Mockups are the validation of all your concepts that were put out and presented to a sample consumer group. It is a means to correct any flaws or problems that manifested during the mockup presell phase. From there, businesses can move onto developing and creating their product with a margin of error that is fairly negligible.
When product testing on real users has been completed, and your firm has ironed out all the issues that arose during the mock up, it is time to focus on scaling what your brand has created. Think of growing your brand, look into ways of expanding your services and your consumer reach.
Include products that not only complement your initial successful offering but one that can further push the brand higher.
For a more in-depth understanding of the GPDS Method check out the book Minimum Viable Mockup.
Investors aren’t the gatekeepers to success, this is something founders need to understand. The existence of venture capital can limit you and your business when all funding comes from investors. When you take on VC funding, you are in essence selling a share of your profits or the business. This entails lost opportunities in reaping the rewards of all your hard work. There are many other ways for acquiring capital for starting a business or for growing an existing one.
Starting a business without the added weight brought on by investors can result in large benefits that will easily outweigh any cons, such as controlling the path of the business, not having to come to a compromise with shareholders, and easily being able to switch business directions when you see fit. Startups that opt-out of VCs should just be prepared to spend more on the most crucial aspect: time. Learning how to take on various responsibilities while making the necessary sacrifices to grow the business is just part and parcel of investing your free time on your startup.
Building a business from nothing is usually very cumbersome. Many founders are then worried about building a company without having the initial cash flow venture capitalists can provide. There is no denying that creating a brand without investors is difficult. It is challenging, but it is doable. While there is nothing wrong in seeking capital from investors, for the most part it would be more beneficial to consider additional funding at least two years into the company’s run.
Forget the startup pitch decks, and just build.