Now that we’ve reviewed all five funding possibilities for entrepreneurs, we’ll get Rich’s closing thoughts on the matter.
For me, the choice to fund or bootstrap isn’t a matter of right or wrong. It’s just a matter of preference (and, granted, I have strong preferences). There are plenty of pros and cons for each approach. If you choose funding, whether you find an angel, family member, credit card, or VC, you must be cognizant of one potential roadblock: distraction.
This past year I have been working with a brilliant young entrepreneur. I watched with great interest as he reported to me every several weeks the marked and smooth progress he was making with his selected VC. Knowing my own living hell in dealing with snakes, his optimism piqued my interest. I truly hoped to witness a positive experience. Knowing that his required funding event was two million dollars, I was horrified and confused when the VCs convinced him that he needed ten million, not two.
One day he walked into my office, and instantly I knew what had happened. Emotionally bloodied and bruised, he explained the waste of the last three months of his life. He was sure the funding would execute based on a completed term sheet. He had stopped doing the side engineering work that covered his personal expenses. It was right then that the VC turned out to be disreputable. The deal fell apart at the due diligence phase—no gigs…no funding…no fun!
At one time, Ron worked in a building with a sister company in a thriving, high-demand industry. The sister company operated both on a bridge loan and on revenue generated by sales of services and products. It started taking off, and its executives decided that with additional funding, they could scale the business rapidly to make a nice return in a short period of time.
The process to secure the funds was at once grueling and exciting. The entire company got caught up in the pursuit of funding; as a result, other vital parts of the business were ignored. The executive team spent countless hours building pro formas, gathering data, and presenting to VCs. Then the executives, based on the anticipated funding, decided it was time to start building a new facility. They used their existing funds to get the construction started. Heady and exciting times, right? Well, they forgot a minor detail: running the business. You can’t neglect day-to-day operations pursuing funding.
You know the outcome of the story. The funding fell through, the company could no longer make payroll, and, instead of growing, it downsized. No need for a brand new building now! The only highlight was that the company Ron worked for watched and learned from the process while preparing for its own funding event. It was during one of the executive team’s planning sessions that they heard the sad tale. Then and there, they adopted a plan to assign a “tiger team” of executives to go after funding, while the rest of the executive team ensured that day-to-day business operations moved forward. And what happened to the new office building that was under construction? The company Ron worked for got to move in.
The major risk with pursuing venture capital is that you can easily end up doing crazy things, things completely at odds with your rules, objectives, and dreams. I have watched colleagues change their entire business model to adapt to venture capitalists who didn’t even understand the market they were in. If that works for you, work it—but remember to manage emotion with logic and to keep your numbers in line, making sure that everything falls into place.
Porter’s Points: Fund the Runway
- Once you have worked out your pro forma and set some ground rules, look into how you will get your funding. Do you need an initial funding event? How large?
- Never discount bootstrapping in favor of more traditional methods. Remember that the unconventional, slower route may be more rewarding in the end.
- Always know who and what you are dealing with. Weigh the pros and cons for your specific venture before taking action, and be sure to learn from other ventures around you.
With that, we wrap up Chapter 4: Got Gas. Chapter 5: The Rules, is up next!