By Vineet Madan
Rippling, a company that helps businesses streamline HR and IT, secured $250M at a $6.5B valuation. A cash flow management business, Pipe is raising a $150M at a $2B valuation, a little over a year after raising a $6 million seed round from Craft Ventures. Meanwhile, the popular clothing line Hire The Runway has raised more than $500 million and is set to go public with a value of more than $500M.
It’s simple to be jealous of the hyper-growth and endless pools of cash available to today’s rock-star innovators. They headline Saturday Evening Dwell and move markets by posting memes (we’re looking at you, E Elon MuskObtaining large amounts of business capital in a short period seems to be the only road to startup success…or is it?
Thousands upon thousands of others are toiling away in near-obscurity for each entrepreneur who grabs the news with eye-watering fundraising figures. There are almost two million startups in the United States alone less than two years old. There are scores of non-VC funded unicorns that have grown into family businesses — MailChimp, Shutterstock, CarGurus, SurveyMonkey, and Atlassian are just a few that didn’t rely VC-fueled rocket fuel to take off.
In reality, lots of the tens of thousands of businesses that spring up each year do not expand their capital.
There are no legends about epic travels up and down Sand Hill Street. There will be no chasing Patagonia vests at VC conferences and certainly no late-night Twitter DMs with Marc Andreesen.
However, grinding a route to a viable business might take a decade or more without business capital. However, conquering the difficulties of starting a business without having access to finance may be very rewarding.
Here are a few suggestions to help you plan your journey:
1) Create services or goods that people are willing to pay for.
The famous, venture capital-fueled “land grab now, enterprise mannequin later” strategy is very risky and never the most likely road to success.
It doesn’t have to be difficult—to start Shutterstock, Jonathan Oringer bought a digital camera, shot 30,000 photographs, and launched a website selling low-cost stock photos that he had taken himself.
Product-market fit is still important, and your initial product will be a minimum viable product (MVP). They should, however, be adequate to persuade your target customers to understand the value, take out their credit cards, and place an order. Keep in mind that they are paying you not just for what you can provide now but also for what they believe you will become in the future. Why?
Early revenue pursuit reduces money to leak and shortens the break even. While many entrepreneurs are hesitant to put anything out without “the right product,” they don’t allow great to become the enemy of “good” and a sustainable business since it’s easy to burn through thousands of dollars and never get there. By the way, revenue as a financing supply is non-dilutive and immediately additive – to several – to the worth of your company. Attempt to reach initial revenue as quickly as possible, ideally within the first 12 months.
“While many entrepreneurs are hesitant to put anything out in search of ‘the right product,’ don’t allow great become the enemy of ‘good,’ and a successful business, since it’s easy to burn through thousands and thousands of dollars and never get there.”
2) Develop a business model that works, scales, and can be used to support growth.
A basic background in economics is beneficial, but all you need is a basic comprehension of fixed and variable pricing.
Building a long-term business will be very difficult if your sales and advertising costs outweigh your earnings.
Too many businesses succumb to the allure of pricing (with a margin) on variable prices, neglecting to account for the reinvestment requirements of fixed prices as growth accelerates. Don’t become a part of one of these businesses.
According to a JP Morgan Chase study, natural development accounts for the bulk of small firm income four years after its start.
Early on, pay attention to revenue-generating customers, keeping in mind that product-market fit still applies. Get to it as soon as possible to reduce the money leak before reaching real margins and improving your chances of surviving and prospering.
“According to a JP Morgan Chase research, natural development accounts for virtually half of a the majority of small business revenue four years after its inception.”
The importance of consistency cannot be overstated. According to the US Financial Institution, 82 per cent of businesses fail due to financial mismanagement.
3) Consistent working capital
Not having the right product, price, or distribution is one of many known hazards to successfully building a business. A savvy, resourceful entrepreneur will promptly conduct the research and identify these issues.
Working cash management is a challenge that most entrepreneurs don’t anticipate, and that is difficult to manage in real-time. It’s also a problem that will only become worse as your business grows.
Scaling necessitates additional resources, such as employees, stock, servers, and so on, all of which cost money right now.
Buyer contracts with 30- or 60-day payment terms might cause your cash collections to lag behind your spending growth by many months or more.
Working capital is the difference between your money collected and what you could be paying right now. According to a well regarded US Financial Institution study, as many as 82 per cent of businesses fail due to cash flow mismanagement.
Working capital is one of the main concerns that keep me up at night and one that we’ve carefully controlled for over five years employing a rolling 13-month money flow projection spreadsheet whilst growing Junction at a 90+ per cent CAGR over the past couple of years.
There are non-dilutive funding methods available, and entrepreneurs today have more options than ever before. As your business grows, look into Small Business Administration grant programmes and other options such as receivables or recurring revenue finance (e.g. Pipe).
Don’t allow working cash flow mismanagement to become the reason your company fails to meet its goals now that you’ve learned about it.
“Working capital management is a challenge that most entrepreneurs don’t anticipate and is difficult to manage in real time, and it’s a problem that will only get more severe the faster you grow.”
4) Pay attention to your customers.
One of MailChimp’s co-founders made eight to ten cross-country travels every year to chat with small business owners and find out their pain points. MailChimp turned these dialogues into new approaches to make their life easier. Listen, ask questions, take notes—this isn’t the time to sell; you already own the company. This is the moment to pay attention, research, and find buyers who can help you test and create new alternatives and capabilities.
Customers want to grow with you and are involved in your success with their businesses. We’ve used one strategy at Junction to provide a high-touch experience to our first set of customers. My co-founder and I are both deeply invested in these cherished customer connections and will continue to do so in the future. The insights gained from these discussions are unrivalled, and you’ll need long-standing customer references as you “stage up” the prospects you’ll be presenting.
Build and maintain these connections; they are critical to your long-term success.
“Customers WANT to grow with you and are engaged in your success with their own businesses.”
While finding customers, fine-tuning pricing, and handling working cash will never make the front pages; they will help you build a large and long-lasting business. More entrepreneurs should consider being ready to raise venture finance for as long as possible – or maybe never raising it at all. If you choose this road, disregard the headlines and self-congratulatory VC tweets and know that you’ll be following in the footsteps of many more people than you’ll ever know. We are delighted to have you as a member of our community.
Vineet Madan (@vimadan) is an occasional angel investor, former company enterprise investor, and founder and CEO of Junction Education, a market-leading studying platform-as-a-service that powers digital studying for Adweek, Entrance Workplace Sports activities, LingroLearning, Yale College Press and different corporations and organizations on the forefront of reworking training.