By Dileep Rao
Are you a tech expert who wants to start or build a high-growth venture?
If your first instinct is to write your pitch deck and make a dash for the closest venture capitalist, or VC showcase, stop. Hold your horses. Corral your first instinct. Note that Zuckerberg did not go to VCs or pitch contests. He wrote the code and started marketing to Harvard students and then to the rest of the world with capital from friends and family, followed by capital from Silicon Valley angels. When the VCs came, he controlled them. That’s why he is one of the richest people in the world.
You may not have rich friends and family, but here are a few tips to help you finance, grow, and control your venture to keep more of the wealth you create.
Make your business strategy more capital-efficient. Few entrepreneurs think of a finance-smart business strategy when they start. That’s one reason why few become wealthy. When Joe Martin built Boxycharm.com into a unicorn, he had the skills to sell online, and asked his customers to pay upfront. He started with $375 and did not use VC. Read Here.
Bootstrap to grow with positive cash flow. Cash flow from the business can be your best source of financing. To have a self-funding business, link business and finance strategies. Bob Kierlin built Fastenal by linking his gross margins (income statement), inventory (balance sheet), and management training (HR) to grow at 30% per year from internal cash flow (Bootstrap to Billions.) He started with $31,000 and did not use VC.
Use your savings (be frugal to have savings). Savings not only helps you get started and reduces your need for capital, but it also decreases dilution and shows investors that you are capital-smart and committed. Dick Schulze borrowed $9,000 against his house to build Best Buy and did not use VC.
Seek capital from friends and family. Many do not have relatives with capital to spare. But if you do, ask them for capital. They may be the only ones who care at the start. And if they have capital to spare and they do not fund you, examine yourself.
Seek capital from sources who will not seek control. This can include governments, foundations, or angels. They usually do not seek control, and if they do, seek someone else. Jeff Bezos got startup financing mainly from family and small investors who did not seek control. And when he got VC after take-off, he stayed in control.
Get financing from business-chain sources. This can include customers and suppliers. Vendors may be willing to give you very attractive terms. Richard Burke founded UnitedHealthcare with a home mortgage and financing from the physicians in his networks, and he did not use VC.
Use loans and leases that you can pay from cash flow. This assumes that you have the cash flow to satisfy the terms of the loans and leases. This means that you need to grow with cash flow. This is what Sam Walton did, and he did not use VC.
Your best financing is from revenues. Use sales as a financing source. When Michael Dell started selling PCs, his business strategy was to sell customized PCs direct to his customers. Customers were required to send their payment with the order. Dell used this cash to build his business, and he did not use VC.
The most expensive financing is from VCs who demand control of your business and a change in CEO. Steve Jobs made this mistake and was fired from his venture. He only returned to Apple because the succession of CEOs failed to bring Apple back from its downward spiral, and the board had no choice but to ask Jobs to return. But few are this fortunate.
MY TAKE: Use finance-smart skills and strategies before Aha to grow more with less and reduce the cost of capital. Seek VC, if you require it, after Aha, when your potential is evident, and you can get capital on your terms.
About the Author
Dileep Rao was a VC. Now he is a Reverse-VC. Dileep Rao: LinkedIn
