I’ve been thinking about Dan Martell’s recently post, “To Raise or Not to Raise”, which encourages entrepreneurs to “go out there and make some money” rather than being too focused on raising seed capital.
It’s solid advice, particularly in Canada given ideas rarely (ever?) get funded. In many respects, the pursuit of venture capital, while sexy and challenging, is distracting and a productivity killer. Getting funded to develop an idea is a nice luxury but it’s also akin to putting the cart before the horse.
In talking with an entrepreneur who has built a large community, the big advice he offered to start-ups is the importance of getting “traction”. This is different from making revenue because it’s about attracting and delighting users with your service. Once there is a critical mass of users, it can open up a variety of doors to generate revenue.
A question is how do you attract users without money for marketing or customer acquisition. Obviously, making people pay for a service is a no-brainer but it’s also about being creative and flexible enough to find ways to get lots of users while, at the same time, managing to pay the bills and put food on the table.
It’s a concept called “Hamburger Profitability” in which an entrepreneur survives financially by supporting the start-up through things such as consulting or a part-time job. It is a tough way to make a living and establish a business but if you’re successful it also offers tremendous experience and the traction to seek financing without being desperate or without clout.
It would remiss to over-estimate the challenges in getting traction because it’s not a simple proposition. It’s a combination of having a service that is accessible, user-friendly and delightful, smart and creative marketing and some luck.
In the scheme of things, traction is a huge hurdle for entrepreneurs. It’s one thing to start a business or have a good idea, it’s another to convince lots of other people to embrace it. But if an entrepreneur can overcome this hurdle, it can set the stage for success and maybe even venture capital.
Ho my… I love those kind of posts. Especially since I’m just starting up my new company (I sold my fourth this spring, all bootstrapped!)
I just had a discussion about funding with a potential partner this week. I’m the kind of “proof of concept” guy that has to build from scratch and see if I can get revenue out of this. The other guy was at first minded toward funding.
I thought a lot about this but I can’t see myself asking for funding before I can prove for sure it’s viable. Maybe it’s a lack of confidence? In the other hand, funding is not a free lunch. Somewhere you lose something like liberty. I think You’re not your own boss anymore.
Also, what would I do with funding? Hire developers and designers? That might help for sure, but it adds a complexity layer to the business which I’m not sure is a good timing for this. The business model can assure an organic growth by itself up to 20 employees. At least, that’s what I believe.
I also think that funding make you lose focus of the real thing. I mean I have to get my hands dirty in the product belly. I don’t have time or will to go get funding and put on a tie to convince VC. I’m not a CFO, I’m the “get things done” guy
Sorry for this brain dump. Your post is really helping me staying on track!
Stephane,
Thanks for the insight. It’s great to get perspective from someone in the start-up “trenches” who can offer thoughts on the different aspects of doing a start-up. Thanks for the comment. Mark
I agree with Stephane’s comments. Going for VC funding without first completing a proof of concept involving paying customers is a distraction and a waste of time.
Hi Mark,
Good post – “Hamburger Profitability” seems like the path that needs to be taken prior to establishing MVP and building traction. I recommend avoiding this route (if possible) because it really does accelerate burn out and really challenges your ability (and team) to execute effectively. I’m all for doing whatever it takes to build a great product that provides real value, but there is no question that even small amounts of support capital can help tremendously. I also agree that with any purchase decision, be it private equity, real estate, etc. you will be on the losing end of the deal if you’re desperate.
I was talking this over with my team the other day, and thinking about this a lot after Dan’s post and I could not agree more. The extra time and losing focus funding takes is just nuts, plus its super hard and also takes you on an emotional roller coaster. Would you not rather set yourself up so people come knocking at your door once you have something that is working, just sounds to me like it makes so much more sense.
The other thing you should ask yourself is what do you really need that money for?
Probably staff…. so why not take those shares you would sell to investors and offer them to staff in exchange for work. This sounds like a a much better idea to me. Every single person that works for our company has the ability to work as much as they want for shares. Its true people need to pay their bills and we all find a way to do that but if you can’t convince someone to work for shares you will never be able to convince anyone to give you money and your idea or business model is probably not that good anyways. . .
Dealing with investors has so many ups and downs. When someone asks me to write a business plan of more than 6 pages I can’t even take them seriously anymore and that happens a lot in Canada. Have they not heard of Y combinator? no business plans… that is the future anyone else is in the stone ages. I now pitch to investors for fun and mostly for networking and getting possible clients from them. This does 3 things gets me exposure (IE possible client referrals), reduce my stress to 0, and also when I will need investors they will all have heard of me over and over… but meanwhile we don’t really want any of their money…
So my advice to entrepreneur is raise your first round with employee shares instead of money from outside sources, then everyone is more committed and its a lot cheaper.
I was talking with a new mentor the other day and he was amazed how low our burn rate was (you probably wouldn’t believe me) and how big our company at gotten already on very very little funding. My reply: I would rather share the wealth with the people who are making this happen then some guy in an office who has no idea what it is we really do.
Sean,
You raise a good point about why a start-up needs money. Often, the best time to get financing is when you’ve got solid sales and/or users, and then want to take it to the next level. Money gives you the financial muscle to hire the right people, get a bigger office, etc. to do more. In that sense, it’s the right money at the right time. Thanks for the comment. Mark
Another add-on to this. I have realized the only people who are dedicated and smart will hustle to make ends meet to work with us. And really we want hustlers, lots of them. Smart people just figure out a way to make things happen.
The other day we “hired” a new guy and told him we were going to pay him either a super shitty salary in cash and some shares or an amazing salary in shares but also find him a bunch of contracts and clients so he would get busy. At the same time teach him how to quadruple his billing rate for projects over the period of a year if he was ready to learn. When we were meeting with him I knew in my gut he wasn’t a great guy for our team but he had a great reference so we kept the conversation going.
Today I got my proof. He decided to opt-out. He never really started and we thought about “firing him” many times cause he couldn’t even deliver on simple training tasks we asked him to do. But do you really want to fire someone who works for equity? The answer is yes and we have done it in the past. Now keep in mind this guy is young as no obligations and could have joined our team very easily. I would understand if he had a family and commitments but he doesn’t and he just filtered himself out of our company even after hearing all the amazing stuff we are doing.
I had predicted it after the a few meetings but I got my validation today. Now imagine the opposite. I am full of VC money and this guy shows up, we train him he starts working and we waste 3 months on some dude that is not even that motivated. Imagine he does an ok job and stays on for years… but he would have never been a winner. Winners make things happen, winners do whatever it takes, winners win. One could argue I did waste a little time meeting him, but really I did it as a favor and my software does most of my screening anyways. The main point is just how not having money seems to bring the best people to the top. We are now building a very strong core group of smart people because we all hustle all the time, plus it also means we are not scared of working….
His email today: ” I don’t see myself spending more than 8hrs a day on a computer..” and at this stage we don’t want to work with people who think like that either… Just goes to prove that the best way to see a persons ability is to have them prove to you they really want it.