Most people tend to think that most startups deal with investors and venture capitalists (VCs) at some point in their company’s life cycle. The funding model of Silicon Valley comes to mind, throwing fast and early money at good ideas that can scale quickly. Founders have an idea, talk to some funders, a cheque is cut, and everything is then in place to grow your business.
In reality, very few startups will ever get access to the kind of Silicon Valley-style investments that are made famous on television and LinkedIn. And yet, most founders continue to chase that dream, ignoring other paths to commercialization that come with a reduced level of risk, and can create a business model that is more sustainable in the long-term.
What does it look like to build a startup that doesn’t rely on VC funding? Here are some topics that founders should consider when setting their long-term business (and financing) strategy – particularly when you are just at the beginning of your startup journey.
Do my startup’s long-term goals align with VC math?
Most people think that investors are looking for safe bets. In reality, a vast majority of companies that VCs invest in will fail. This is baked into their business model: one big win will more than offset all of their other losses. Therefore, a VC will only want to make big bets, on a startup that promises to make the kind of outsized returns that their business model demands.
A few years ago, a Leverage Point member was trying to raise a seed round for their company. They reached out to multiple investors, and one common thing they heard from was that the company wasn’t investible – because its growth projections weren’t high enough to make it worth that fund’s attention. These projections forecasted $25 million in annual revenue by Year 5 – not a small company by any measure, but still not aggressive enough for that particular VC.
As a founder, ask yourself if you have what it takes to grow a company so fast you are making over $25 million in annual revenue in a 5-year period – and what you would need to do to achieve those aggressive targets. If that seems unrealistic for your business model, consider charting a path that allows you to grow your business at a smaller, more sustainable scale.
Can I focus on sales and traction rather than chasing investors?
Ultimately, the true test of a successful business is if you can find people willing to invest their time, resources and dollars into your solution. Most founders who are successful in raising investor dollars will have validated their market with early sales, demonstrating they have something people want to buy.
VCs are drawn to success, and the most compelling business case you can make as a founder is validating your business plan with early customer revenue, traction, and satisfaction. Not only does that help you stand out from most other startups, but it gives you a greater diversity of options on how to manage your cash flow. Bringing in sales revenue lets you access more debt financing from traditional lenders, and allows you to apply for grants that provide a percentage of overall project funding. Both of these options are non-dilutive, which means you aren’t giving up ownership or governance control of your company.
As a founder, your time is limited. Ask yourself if your time is better spent on customer acquisition, or chasing investors – if you can manage the first, you might be setting up your business for greater success over time.
Is this the right time for my business to take in equity funding?
Even if you aren’t yet able to attract sales revenue, you might want to hold off on reaching out to VCs. Investors get dozens (or hundreds) of pitches sent to them every week. That gives them the opportunity to compare and identify top-performing startups from a very large pool of applicants. So, what are some things that founders look for?
It’s not uncommon for VCs to invest pre-revenue companies (as long as that is the type of company they typically invest in). If the vision and founding team are strong, and the market opportunity is too big to ignore, early access to equity financing is possible. However, not every startup is going to meet these criteria.
If you are building a product or service that can compete on price, speed, or quality within a competitive environment, then you might have a solid business case. Otherwise, you might need to figure out what makes you stand out within your industry – and what you can do to protect that advantage. A strong IP strategy, successful pilots and case studies, and other customer validation techniques can help your company stand out. Make sure you are de-risking your business model in whatever way you can to help show why your company is the one to invest in ahead of all the others.
Don’t let investor FOMO influence your startup’s strategy
There are countless stories shared between founders of companies that have skyrocketed off VC funding, found great success and scaled quickly. These stories are the exception, not the rule – many more companies either never get VC funding, or do get VC funding and can’t survive.
However, every business model and startup are different – it’s important to evaluate your market, value proposition and competitive advantage when deciding your own path to scalability and success. If you’re unsure on how you want to chart that path for your business, our team at Leverage Point has a successful track record of helping companies launch their commercialization, and investor strategies. We’d be happy to sit down with you and determine how we can help your company grow too.