Do you really need money for your start-up?

12/11/2013 - 05:35

Sometimes it can be better to go as far as you can before using other people's money.

Do you really need money for your start-up?

As reported last week by Business News, the tech start-up community in Perth is severely underfunded as compared to other cities around the world.

By necessity, these companies are surviving on the proverbial 'smell of an oil rag' as founders work part time or take on consulting jobs to keep their dream alive.

For example, of the eight Founders Institute companies that graduated in June this year, not one has yet been funded.

In many cases of course, a lack of initial funds may be a good thing. As the saying goes, 'a fool and their money are soon parted'. It is very easy to 'buy things' when you are in start-up mode (programmers, office space, marketing) when perhaps you should be more focussed on sales (getting the product out there, gaining early sales, tweaking the offering).

Without funding, it can also mean these fledgling companies develop their ideas further, and this provides time to see if it is going to work, before betting the house and getting in too deep. They go for organic growth, winning early clients who provide all-important feedback to develop the idea and become stronger.

One of the best papers I remember reading on my business masters course was Amar Bhide's 'Bootstrap Finance' (Harvard Business Review, 1992). After researching thousands of start-ups, Bhide argued that the most successful ones developed their businesses with minimal money, keeping their powder dry for when they 'got out there'. Opportunities came about just by being in business, and often you would have no idea of what these might have been beforehand.

Indeed, rather than the big funding model Bhide found that it was often better to focus on quick break-even, cash positive projects. Rather than building the crack management team, the bootstrappers tended to find and motivate the 'diamonds in the rough'. Getting operational quickly was key.

Another issue with being funded is the extra responsibility that can come with it. Tech start-ups pioneering new markets seldom get it right first time and have to remain nimble. Having shareholders breathing down your neck expecting you to execute on the very business plan you used to gain their money can lead to what Bhide called 'diminished flexibility'. Opportunities (and 'pivots') are then missed.

I can certainly talk from experience of the added stress and sleepless nights caused by having shareholders' money at stake in my own start-up in the early 2000s. We got through the difficult period, but I wonder what we would have done if we'd done it all on our own money. Would we have given up earlier? Possibly. Were we funded too early? Perhaps. Would we have ended up pretty much in the same place anyway? Probably.

In the end our venture turned out all right, but it was touch and go for a while. As I look around at the early stage ventures in Perth right now, I do counsel them to keep going on their own until they really need funding from outside. Of course, the catch 22 is when you need funding, no one is interested, and when you don't, everyone suddenly is.

My advice for these companies? Go as far as you can, as long as you can, on your own. If you can get out there, get out there, for you will learn more from your clients and the market than anything else. 20 years on, Amar Bhide's findings seem to be as relevant as ever.


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