Funding a Start-Up

In my prior post, I discussed the importance of 'intelligent resilience' for co-founding a start-up. Today let's discuss the third most critical decision you make when you co-found a start-up: funding. We will discuss the first (i.e., the business idea) and second (i.e., co-founders) most critical decisions in the next post.

At a high-level, funding is a binary decision: 1) bootstrap/self-fund; or 2) raise investor funds. There is no right answer on which to choose. Anecdotally, I noticed most founders tell me they wish they had done the opposite of what they actually did. That is, if they bootstrapped they tend to tell me "I wish I had raised investor funds" but if they raised investor funds they tend to tell me "I wish I had bootstrapped".

I decided to raise investor funds. I had no hesitation in this choice. Before explaining why, let's briefly cover the pros and cons of each approach.

Bootstrap

Founders choose to bootstrap for two primary reasons: 1) they do not want to give up any equity; and 2) they are unable to raise investor funds. The first reason is self-explanatory – the founder wants to own 100% of the business they are creating. This reserves for the founder the entire future value of the business and provides the founder with complete control of the business - they can do whatever they want. The second reason can have two root causes: 1) no investor is interested in the business; or 2) the founder does not know how to fundraise.

The primary downside of choosing to bootstrap is (usually) far fewer resources available at the earliest stages of the business. So, the founder (usually) must patiently and gradually build up the business from nothing. This can take a very long time and/or limit your rate of growth to the rate at which the business is growing.

I think there is another downside that founders too often do not consider: you do not benefit from the experience, ideas and help – beyond a check – that investors would bring to you.

Investor Funds

Founders choose to raise investor funds for two primary reasons: 1) the business has significant capital requirements to even start operations; and 2) they want to jumpstart growth as soon as possible. As an example of the first reason, consider the amount of capital it would take to launch a rocket company (e.g., SpaceX) – it would be infeasible (or at least unlikely) to bootstrap a rocket company because you need significant highly specialized engineering expertise and there are complicated regulatory hurdles to overcome. There are outlier cases like Blue Origin but not many people have >$100 billion to invest in their hobby.

The primary downside of raising investor funds is that it is very hard – by which I mean 1) it can take a long time; 2) you have to convince other people about the value of your business idea; and 3) you have to convince them you are the right founder to execute on the business idea. Basically, you have to learn how to tell a really great story - which is a useful but difficult skillset to learn.

Why Did I Choose to Raise Investor Funds?

1. If I can convince other people my business idea has merit, then it strengthens my own conviction in the idea – talk is cheap, writing a check is commitment
2. The idea behind symphonie.ai requires significant capital to get it off the ground fast enough to be worthwhile to me – my opportunity cost is large so I wanted to move quickly and I was willing to trade equity for speed
3. Investors would bring certain expertise and functional experience that I lacked – they would help me think through the execution and keep me grounded by asking hard questions
4. Investors would bring their professional networks and success in business is often as much "who you know" as "what you know"; there are situations where having the right connection is critical to what we're building at symphonie

I can illustrate [4] with an anecdote. When I first conceived of symphonie with my co-founder, we had never raised any investor funds. We had no experience in how it works and what to do. By coincidence, around the same time someone I respected a lot had recently left an executive role at Shopify and joined a Venture Capital (VC) fund - Forum Ventures. I called this person to ask them to educate me about the process and how it works – I had no intentions beyond that. But a few minutes into the conversation she asked me if I was willing to take a check from Forum's accelerator program. I decided "yes" immediately and went through an abbreviated review process for acceptance into that month's accelerator cohort.

If I had not known this person, if I had not had a multi-year business relationship where they knew me quite well, I doubt I would have gotten that first check. And if I had not gotten that first check, I might never have pursued co-founding symphonie. That is why processional networks are critical and that is why I value investors beyond the check they write – often access to their network is worth even more than the check itself.

So, is raising investor funds the right answer? Not necessarily. It is the right answer for me and for the business I am working hard to make successful but it could be different for you and your business idea. There is nothing wrong with bootstrapping. You have to weigh the pros and cons for yourself and your situation before choosing one or the other.

An Idea Has Little Value but Execution is Priceless

I will add one opinion about bootstrapping that I feel very strongly about: It is better to own 25% of $100 million than 100% of $0. I sometimes come across potential founders who have a big idea but lack the capital to pursue it and refuse to try to raise investor funds because "its my idea why should I give up any equity?" I think that is a huge mistake.

I would argue the value of an idea is precisely $0 and – yet – everyone guards it jealously. All the value is in the execution of the idea, which is super hard. My thesis is that practically every great idea has been thought of by dozens of people but only one person has the chutzpah and resilience to see the idea through execution. Most people are dreamers... they think of something but are unwilling to get off their bum and actually pursue it. And when they run into their first roadblock, they give up.

So the idea is worth $0. It's the execution that matters. And this is why founders and leaders are important. You aren't investing in the idea... you are investing in their determination to make it happen. Go read about the history of the light bulb and the radio to see that it wasn't Thomas Edison alone who thought of the light bulb... we only remember him because he was the one relentless enough to figure it out.

And Edison – by the way – had investors:

In 1878, Edison formed the Edison Electric Light Company in New York City with several financiers, including J. P. Morgan, Spencer Trask, and the members of the Vanderbilt family.

So, Where Do We Go From Here?

This introduction into start-up funding opens up these topics for discussion:

1. Should you go through an accelerator program? What's the pros and cons of doing so?
2. If you decide to raise investor funds, what does the process look like? What works well? What mistakes did I make that you can learn from?

I will cover these topics and more. If you want to follow along, please subscribe. It's free.