There’s a gross misconception that shapes today’s startup landscape: you have to raise money in order to successfully launch a scale a company. It makes sense that young entrepreneurs would live and die by this notion, because some of the most successful startup stories of all time begin with a dramatic investor pitch. Additionally, many young entrepreneurs with game-changing ideas enter the arena with low bank accounts that seemingly cannot support all of the operating costs necessary to developing a product and starting a company from scratch.
All new entrepreneurs are faced with two choices early on: follow the well-trodden, manicured fundraising path that promises an array of comforts, including money, guidance, and connections. Or, carve your own bootstrapped path without the financial and network support of others. It’s easy to see why most entrepreneurs opt for the first path, because it promises immediate comforts that are too tempting for most cash-strapped entrepreneurs to overlook.
But there is a dark side to fundraising that is often left out of the narrative. Blake B. Johnson, a Los Angeles-based entrepreneur, has sat on both sides of the fundraising table. In addition to advising startup founders on how best to structure and manage a growing team, Johnson is also about the fundraising process to ensure that founders really understand their options. According to Johnson,
“When young entrepreneurs enter into investment agreements with established VC firms and investors, over 95 percent of the time it doesn’t end well for the entrepreneur. Fundraising is inherently designed to benefit the investor. By choosing to accept cash and the promise of five or so introductions, entrepreneurs relinquish their visions, and ultimately their control over the futures and fates of their organizations.”
Bootstrapping a business may seem like the more daunting choice, but it is not impossible to self-fund your way to success. Once you’ve decided to strike out on your own, there are three major steps you need to accomplish to set yourself up for scalable success:
Make a plan…and double it
Rarely, if ever, has a successful venture followed a plan, timeline, and budget accordingly. In most cases, reaching a milestone takes twice as long and costs twice as much as originally anticipated. Yes, it’s necessary to define a business plan from the outset, but you also need to apply realism and agility to that plan. If you acknowledge the loftiness of your expectations up front, you’ll be able to instate a more supportive financial and operational structure. Too many startups go up in flames as a result of an overly aggressive timeline that did not pan out.
Lower your operational expenses
Taking the time and effort to define the capital, equipment, human resources, and marketing budget you actually need to scale your venture will spell the difference between meeting (and exceeding) your market goals and closing your doors. You do not need a fancy office or a boutique PR team to grow your business – those are nice luxuries, but they are not essential. What you do need is an experienced and impassioned core team, up-to-date technology, and a go-to-market budget sufficient enough to put you on the map, but not so excessive that you feel emboldened to attempt to overpower established fortune 500 entities right out of the gate. Practicing frugality as an entrepreneur may not be fun, but it is the only way to ensure that you don’t dig your own grave.
Additionally, it is your responsibility to put the money you earn back into the company, rather than into your pockets. The strongest startups are the ones that learn early on how to feed their revenue streams back into their company machines to enhance and expand company initiatives.
Nail down your cost per acquisition
Naive entrepreneurs daydream about potential revenue streams without giving sufficient thought to how much it will cost to acquire customers who will feed that stream. Determining how much it will cost your business to acquire a single customer will enable you to set realistic financial projections. Will that single customer only offer one-time value, and how long will it take to convert them from potential to current customers? These are the questions that need to be answered if you want to determine how much gross revenue you’ll need to bring in to become cashflow positive. Typically, when your revenue to acquisition ratio exceeds the 4:1 mark, you’ll know that you have found a scalable model.
If you’re comfortable with giving investors a loud voice in your company with very little in return– save for the initial check– then by all means, start working on your pitch deck. Choosing to bootstrap over vying for the attention of VC firms is not the most popular route, but if you want to maintain of your business’ future, then it is the only choice.
This post is part of our contributor series. The views expressed are the author's own and not necessarily shared by TNW.