You No Longer Need Investors to Launch a Startup. Here Are 4 Things to Know About Self-Funding Your Company
‘Burning the ships’ and going all in is no longer a prerequisite to starting a venture.
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"Burn the ships!" That's what explorers used to do upon landing in a new undiscovered country. The idea was simple: Without the ship there was no way home, so all efforts had to be made to survive and thrive, without thinking about home. Retreat is easy when you have the option, so remove the option.
For most of my 20 years in seed startup investing, this was the prevailing wisdom that startup investors demanded entrepreneurs follow. Going "all in" (quitting your job, selling your home, investing your life savings) was traditionally a prerequisite to funding.
Today, investors still favor full-time founders who have a lot on the line, but changes to the entrepreneurial ecosystem allow founders to delay putting too much skin in the game too early. Instead, what's more important to investors is that you have a minimum viable product in market, and early signs of market traction.
"If you're not in the market yet, [don't] expect someone else to fund it," said Candice Matthews, founder of Hillman Accelerator in Cincinnati, Ohio. She recommends that founders get to market first, and take on a side hustle to fund the company or build up savings before quitting their jobs and working full-time on the business.
Luckily for entrepreneurs, it costs less today than ever before to do this. Generally, the cost to launch a product has dropped from the million-dollar range to the hundred-dollar range, and development, testing, and generating revenue have become exponentially cheaper to achieve. This means you don't need millions to launch your company and you don't need to chase investors. Instead, you can focus on customers and fund the early stages yourself.
Side hustles are acceptable. Keeping your job at the start is acceptable. So long as you are full-time and have a product and early traction when you eventually ask investors for their money, skin in the game and being all in become less material.
Facebook's Mark Zuckerberg didn't quit Harvard to found the social network--he founded it in his dorm room. Sara Blakely founded Spanx in her apartment while working full-time selling fax machines. YouTube was created while its founders, Chad Hurley, Steve Chen, and Jawed Karim, were employed full-time at PayPal.
If you are thinking about going all in, there are a few things you should keep in mind before investing all your time and money into your new venture:
- Don't quit your day job. A day job is an underrated incubator. A side hustle allows you to keep moving forward and being agile. Especially if you come from the industry that your startup is targeting, you can benefit from staying employed. It allows you to continue to learn about the industry, develop skills, and build out a network--all on someone else's budget. Then you can apply these lessons from a profitable business to your fledgling company.
- Skin in the game is subjective. If you are a trust fund baby, skin in the game could mean millions of dollars. For regular people, it's often much lower--think tens of thousands. For students, who have less money to risk, it can be even lower.
- Don't pay for things personally. If you can, put funds into the company bank account, and then draw from that for things you need. It is very hard to show skin in the game if each founder paid directly.
- Be careful about loans. Most founders will end up rolling the money they invest in their startup into their own equity stake. Investors shun the idea of investing in a company and then seeing the founders take out money they "loaned" the company. If you plan on loaning money to your startup, you should have an attorney document the loan and its terms regarding repayment and consequences for repayment failure. But be aware that most investors will require founders to convert shareholder loans to equity before they invest.
Once upon a time, in the days of the dot-com boom, it took millions to launch a startup. Now, the same activity costs less than $5,000. This means you can get started without investors and without burning the ships.