How to fund your startup: things I wished I knew before I started up
I’m a non-US founder. I’ve never been to SF in my life, but when I started my first business aimed at global markets rather than local customers I obviously landed in the “information bubble” wrapped around Silicon valley-based startups. My bet is: if you googled up startup-related stuff you ended up in the same information universe as I have. It doesn’t come as a surprise, because for many years it’s been a rule of thumb that SF-brewed innovation practices make a golden standard and should be used by startup founders across the globe.
The funniest thing that I’ve had business experience before. I’d build a successful and profitable local online business, a cooking school, as well as a publishing agency. However, I had not considered them to be startups. Because as soon as you hear this word your imagination leaps on the names like Uber, AirBnB, Coinbase… whatever. No one actually thinks of a $600K/year local plumber service as a startup, right? This is a good use case of the phenomenon that David Heinemeier Hansson (DHH), founder of Basecamp calls “disrupto-mania”. He describes it as a prevailing attitude in startup community when no one is content to merely “put their dent in the universe”.
No, startup founders have to own the universe. It’s not enough to be in the market, they have to dominate it. It’s not enough to serve customers, they have to capture them.
This narrative lets you believe that whatever experience you’ve had in the past is irrelevant and that startups world is a totally different Universe with good old Godmotjer fairies who would reward you as long as you have a good idea, right attitude and some traction to showcase. Which is totally, 100% wrong, especially if you’re operating outside the US. And even harsher truth: if you’re not located in San Fran.
Let me tell you what this contagious belief, spreading faster than any pandemic in human history, makes us think. I’m describing here my own thought of few years ago. And as I keep on finding out — due to my extensive cooperation with founders — is still very widespread today. If you don’t think along the lines — you can stop reading right here. But if you do have at least some resemblance of the ideas stated below — please, spend 10 more minutes to go over this text. It is something I wish I had read before I started my founder’s journey.
So, are you thinking something like:
Step 1 — building a prototype/ MVP. I’ve been reading a lot, took some courses and I know that closing a pre-seed round today is not that easy as it was, say, 10 years ago. You can’t show up with a cool idea and great pitch deck and ask for $100K just because you have your vision and understanding of customer needs.
So this is my plan: I’d bootstrap the MVP, get some traction and then reach out to investors (step 2).
If investors don’t work out I can always crowdfund — after all, everyone does it today, right (step 3)?
After raising enough to keep me running for at least 6 month I will iterate and try to get into accelerator (preferably, YC of course — step 4). My chances will be pretty high by now, as I’d already have a product, customers and fund-raising history.
If I don’t get into accelerator (step 5)…well, let’s get there and then see. It makes no sense to plan so far ahead.
What’s wrong with this plan?
Mistake 1: Reach out to investors after the MVP/prototype is ready.
When you have your product up and running it’s already too late to start looking for investors. Founders building their products in the heart of Silicon valley have their connections and networks already in place. If they don’t know someone personally, they sure thing know someone who knows someone. It’s a limited circle, getting inside not so hard, but the point is you have to be THERE. Physically, in SF. As the same DHH points out,
“Don’t you know that surely the fastest and probably the only way to join the uniclub is to rent a mattress in the shifty part of San Francisco where the rent is only $4,000/month? Because while that area north of Silicon Valley is busy disrupting everything, it still hasn’t caught up with the basic disruption of geography. So if your angel or VC can’t drop by your overpriced office for a jam session, well, then you’re no good at all, are you?”
I’m expecting that the time of change we’re living through today will have influence on this centuries’ old practice, but I don’t raise my hopes too high. It’s neither bad, nor good, it’s just how it is supposed to be. It’s proven for a fact that when no established institutions to guarantee credibility of every actor are in place, personal “recommendations” are the only tool that is used.
Think of “dark times” before banks and credit cards: you had to know a shopkeeper personally in order to get some food today under the promise of pay tomorrow. Now you just come in, swipe your credit card and nobody cares where you’re from and what’s your paycheck as long as your credit line in enough to cover this particular purchase. This is where startup industry is right now: in times of personal connections to a few “shop owners”.
It will definitely move further to the “credit cards” level but the problem is, nobody knows when. And when it does, it’ll be a totally different market altogether. Unicorns partly exist because THERE ARE NO global rules, regulators and credibility check. As soon as we create them — the more deluded the Big prize will be. It’s a good old risk/reward ratio. You get less when the business is less risky.
So, getting back to my point. If you’re not a SF startup, you’re not part of a network and you don’t know at least 50 angels personally, your plan is destined to fail.
It is possible to create a network if you don’t spend days on a shitty matrass in SF. Something that I’ve found useful for myself and that might probably help you too: go to Twitter, find a couple of founders of startups in your industry and go through their tweets where they announce a launch of a new service. See, how many investors are already there, in comments? Offering to fund whatever they have? You’d probably need to get the same result. Start building your community by commenting on other people’s posts, by finding connections, by posting useful content. Your only way out without an institution that will guarantee your credibility is to build a REPUTATION.
Mistake 2: Crowdfunding
And again, the idea of accessibility of “people’s money” is widely spread by US-based investors for mostly US-based founders. If you’re a founder in Nigeria, Egypt, Ukraine, Vietnam, Thailand and many more other countries across the globe you’re in a totally different boat.
It’s not that you can’t use this tools. You just have to realize that most probably you’ll get a different deliverable from them.
First thing to consider: a difference between European and US-based crowdfunding platforms is stunning. If on both most popular American Kickstarter and Indiegogo you theoretically can post an idea of a product and offer users to contribute if they find it appealing (in exchange for a small reward, a promise of product or for actually nothing at all). With European platforms (like, OneplanetOnecrowd) it’s mostly about equity. Perhaps, we Europeans are not as good-hearted as our American counterparts, but I believe it has a lot to do with the same lack of institutionalization. If the rules around the crowdfunding practice itself are scarce (like, in case of Europe), the industry try to implement rules from other games (like, traditional investment) in order to make it more risk balanced.
However, it’s not the main headache. There are no “global” platforms for crowdfunding. Meaning, if you want to raise in the US where users are more eager to support great ideas with dollars you have to be a US-citizen. If you want to raise in UK, you have to be a resident of UK etc.
And what if I open a business in the US? Will I be able to crowdfund on Kickstarter? Nope. This one is still closed for you. However, the Indiegogo has more open policy and allows not only individuals but also business entities to run a crowdfunding campaign. In this case you can raise on behalf of a business registered in a particular market.
Anyway, the tip is: go to the platform you’re thinking of. And just read through documentation. Word by word. It’s all there. If not, check out the FAQ sections. All platforms are very explicit about their rules regarding locations and persons vs businesses.
Another tip: there are probably some platforms in your country too. Even if they are not as popular as Kickstarter, try to use them. In my personal practice Facebook groups might be even better for some locations. Try to look for crowdfunding Facebook groups that might suit your purposes, contact admins and discuss your deal. In 99% cases it’s more efficient than wasting your time on daydreams about Kickstarter.
Mistake 3: Get accepted in accelerator
Actually, I’m not going to discourage you from your dream of being a YC alumni. It’s a very prestigious name and only the worthy ones indeed get the honor to receive it. Let’s also keep in mind that YC is one of a few US accelerators that really contribute a lot into developing global startup environmental ecosystem — the YC W21 batch shows impressive statistics with 50% of startups outside the US. No, I won’t plead you to abandon your dream to break into YC. I would like to ask you though: is it really what you want? Are you certain you fully understand what the life of an accelerated startup is? Are you aware of all responsibilities and crazy growth rates that will be imposed on you as soon as you get there? You have to think of this moment as of point of no return. Starting from it ,you’ll be constantly having someone telling you what to do with your business, insisting that they know better what’s better, pushing you ahead, demanding faster growth, more hires, better ARR…
“Once the train is going choo-choo there’s no stopping, no getting off, until you either crash into the mountain side or reach the IPO station at lake liquidity”.
There will be no room for connecting with your customers — there will be only customer acquisition. There will be no long and thoughtful building of your allstar team — you’ll be hiring like crazy dozens people a months, fully knowing that the probability of them leaving you next week is higher than the one of them sticking around. Besides, if you are a reasonable person (and I expect you are as you’ve been smart enough to start thinking of your own business) — let’s count what are the odds of your startup making $500k a year? And what are the odds of it making $5 mln a year? Now, how about $50 mln a year? If you don’t believe you’ll make it up to there, acceleration and VC money is not for you. Plain and simple.
The only alternative to VC money is bootsrapping. But have you really given it a thought, how wide this practice is? How many founders bootstrap their startups compared to ones that get funded? Let me give sobering numbers . The average failure rate for startups is 90% (Source: Investopedia). In the meantime, the chance of receiving a check from a VC firm is about 0,7% (let’s make it 1% to give these VCs a heads start).
So, what happens to this 9% of startups that don’t fail but don’t get access to VC money? They find other ways to fund their business!
When I realized this simple truth that has been lurking behind my “dis-rupto-mania veiled mind” I instantly saw how wrong I was assuming that startup is so different from any other type of business. That I will fail if I don’t establish connections with investors, get accepted in the accelerator of fail to crowdfund. Funding a startup can and should be the same process you’d use for funding a grocery store. You write a business plan and go to a local bank. You research regional grant programs and send applications to them all. You draw an investment agreement and go to your friends, family, neighbors offering your business equity in exchange for money. You explain all risks and downsides and underline upsides and possible gains. But you do it honestly and sincere, without an urge to impress. Because you don’t have to compete with 50,000 other neighbors and family members for that tiny check. And because these are your loved ones. You can’t possibly let them down and loose them if your business crashes to pieces.
You don’t plan a marketing campaign to get your product to 2 mln users by the end of the year, because this is what’s expected from you. You craft a smart and creative way to reach your customers without overspending based on your 1 monthly revenue, not 5 years turnover. No, you probably won’t become a unicorn, shoot a star or land on the Moon. But the chances that you’ll be still running an incredible business and actually enjoy it in 10 years from now, are disproportionally higher. So, choose your bets wisely.