Don't raise money, is what people have been telling me for years!
Finance 101 Part 1: Bootstrapping should not hold you back from raising money, this is why !
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Introduction
Starting a business is like climbing a mountain - the hardest part is reaching the summit, which is creating something people actually want.
Once you're there, don't let your guard down! because the second-hardest part is scaling that mountain of funding.
Without a solid financial foundation, your startup could crumble. Remember, fundraising may be brutal, but it's necessary for survival in the startup world.
This is a first issue of a three part series about Finance 101:
Today we dive deep into:
Why bootstrappers need to raise money
When to raise money
How much money is enough money
🚀 Why bootstrappers need to raise money ?
Bootstrappers: yes, you had traction and more than 10 paying customers… cool, right ?
You need a UI/UX designer ?
You need a sales team ?
You need to pay for that AWS bill ?
You need to pay for ads ?
Are you going to do all of this ALONE ?! 🤨
Nope ! You validated the idea and have a good MVP but scaling needs money and this is where the S*ht hits the fan.
The SaaS game is all about money and competition, it’s a race and even if your idea is original, what would stop a copycat that has the money and the audience and probably the experience to do the same idea ? 🙃
I will give you an example:
My personal experience: Since our users relied heavily on Google to find CV creators, we found out that the key to success in our industry was SEO.
To gain an edge over competitors, we raised capital and invested in a well-known domain name with good domain authority. We also hired a top-notch SEO specialist (560$ per hour) and content strategy expert. It only took us 4 months to see that the clicks skyrocketing.
Our product wasn't better, but we understood that it was a race and if you find a gap and have the resources, you better use it.
Typical scenario: As a bootstrapper, you will probably buy a cheap domain name and spend a whole year learning SEO and content strategy. As a result, you will scale your business with 1% while your competitors will grow exponentially in the field. You did what you can, but you FAILED.
⌛ When to raise money ?
YC says if you can raise money, you should do it right away. However, Hotjar gives more context to this saying and splits it into three scenarios depending on which phase your business is at:
Scenario A: Launching phase
Scenario B: Growing phase
Scenario C: Scaling phase
Scenario A: Launching phase
You have an idea for a Minimum Viable Product (MVP) but don't have the money to develop it ? There is plenty you can bootstrap to get ready before getting funds:
Start by creating wireframes and doing some market research to get a better idea of what you're up against. You need to achieve a deep understanding on exactly what you’re gonna need the funds for.
Next, make a solid plan that outlines what you can achieve with funding and how you'll use the money effectively.
Scenario B: Growing phase
You're already ahead of the game with an MVP and a solid plan for its growth. But how do you fund that growth? Here are some tips:
Start by trying to grow your business on your own. Get creative with funding options like product pre-payments or monetizing your initial product. Consider having a single key customer pay for specific feature development, too. And if all else fails, bootstrap your way using your own funds.
How much money you need will depend on various factors, such as team size, website/service costs, and revenue model. Calculate your runway to see how long you can operate before needing extra funds.
If you're hitting the limits of independent growth, it's time to analyze the situation. Are there issues with team processes or user churn? Funding won't fix these problems. Take the time to find their root causes and address them head-on.
Scenario C: Scaling phase
You've hit a wall, and there's no way to grow your business without some extra help. Also, the growth stop is purely a limited funding problem:
Start by creating a solid funding plan. Figure out how much money you need to reach your next objective or milestone. And remember, be prepared to give up a percentage of equity as you go through the funding process—typically around 10% to 20% per round.
Consider your options carefully. Do you want to go the traditional route and look for investors, or would you rather try crowdfunding or alternative financing options?
Make sure you have a clear understanding of your business's unique selling proposition and your target market. Investors will want to see that you have a clear plan for how you're going to use their money to grow your business.
Investors also need persuading. Usually, just a product that they can see, use, or touch will not be enough. They will want to know whether there is product market fit and if the product is experiencing an actual growth. How much growth ? Usually, 10% per week for several weeks is very impressive!
💸 How money is enough money ?
Startups should aim to raise enough money to reach profitability, so they don't have to raise money again. This will make it easier to raise more money in the future and survive without new funding if the funding environment gets tight.
One way to determine the optimal amount to raise is to decide how many months of operation the startup wants to fund : A rule of thumb is that an engineer costs about all-in $15k per month.
e.g.: 5 employees x $15k x 18 months = $1.35 Million
Must-know facts about funding:
When deciding how much to raise, consider : how much progress the money will purchase, credibility with investors, and dilution.
The amount of money you ask for, should be tied to a believable plan that buys credibility with investors and persuades them that their money will have a chance to grow.
Some startups may need a follow-on round of funding to reach their next "fundable" milestone, which is usually 12 to 18 months later.
Tips :
You should try to give up as little as 10% of their company in the seed round, but most rounds will require up to 20% dilution. You should avoid giving up more than 25%.
When asked “How much are you raising?”
Simply answer that you are raising for N months (usually 12-18) and will thus need $X, where X will usually be between $500k and $1.5 million.
As noted above, you should give multiple versions of N and a range for X, giving different possible growth scenarios based on how much you successfully raise…
Bonus:
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📑Conclusion
Before raising money or doing anything else, it is essential to recognize that you are not just a developer but a business owner. As a business owner, you will be managing someone else's money, and they may not always agree with your decisions. They might ask you to do other stuff or go another route that you don’t like. It is also important to keep in mind that as you grow, you will be responsible for the livelihoods of your employees, and their survival depends on your success. This was the first part to get you familiar with raising money. In the next issue, we will further explore:
Financing options
How to negotiate with investors
What not to do (After raising money)
Ask me questions! Don’t be shy, I am willing to answer and chat, maybe grab some coffee if you are around. Just reply to this email.
I agree a lot of bootstrappers struggle with money and they stick to the "bootstrapper" status more than making money.
🙏🙏