Editor’s Note: In the new podcast Masters of Scale, LinkedIn co-founder and Greylock partner Reid Hoffman explores his philosophy on how to scale a business — and at Entrepreneur.com, entrepreneurs are responding with their own ideas and experiences on our hub. This week, we’re discussing Hoffman’s theory: You need to raise more money than you think you need — and potentially a lot more. Listen to this week’s episode here.
Deciding whether to raise money or trade equity in your business for the much-needed help can be a tough call.
With previous startups, I raised money and traded equity, but with Due, my current venture, I made the tough decision to build it out with some co-founders. We determined immediately that we would use our own funds and sweat equity.
I had some very specific reasons for this choice, and my hope is that this explanation may help you decide how to approach the funding of your own startup.
When I first started out as an entrepreneur, I didn’t have the money or the experience to begin and run a startup on my own, so I believed it was best to involve others with more experience who could help finance and guide me in the direction I was heading.
This approach was beneficial to a certain degree, until I realized that those wanting a piece of the action had completely different perspectives about what the startup should become. The startup was no longer “mine,” it was “ours.” When things become “ours,” the other part of that ours has to be consulted, their opinions used — often — and the original shape of the dream goes down a different path.
In some ways, I felt like I was losing control over my original ideas and did not know how to get it back because of owing these investors a return — so I went along with it. The result was that I felt unhappy and stifled. Although the company was launched, I got out as soon as the startup had made enough money to satisfy the investors. My passion for it had evaporated as soon as others began telling me how to run my company and controlling its direction.
However, during that time, I learned a vast amount from those involved in those startups, and I’m grateful for those experiences and what they taught me. But, I also saw other ways to ramp up my knowledge and experience without necessarily bringing people into the business and giving them a piece of the pie.
With more planning, the right startup tools and resources, and co-founders that share your vision, you can start your business without raising money or giving up equity. Both of those choices tend to take away a few options.
1. Plan, plan, plan.
Planning is everything when it comes to using available money wisely. Careful planning will still leave room for flexibility, change and possibly even a needed pivot to the overall strategy. Planning means honing in on exactly what you want to achieve with the business rather than running with an idea, throwing money at it and betting everyone will just love it.
There’s no way a startup can work efficiently and well in that confused and disorderly manner. When I say, “plan,” it means, plan, plan, plan and then plan some more. Do the careful qualifying and quantifying by reaching out to the audience you think will benefit from your product or service and get these true-to-life feedbacks. And determine the market demand to ensure what you are doing is going to be sustainable.
So many entrepreneurs go out there and convince investors that they can achieve something when they haven’t done their homework. By doing it by myself, I don’t have to worry about paying others back and it’s on me to find out how to make it work rather than assume someone else has my “financial back.”
2. Do your research.
In order to plan effectively, I spent considerable time on research, including places where I could get free resources for building the business. Besides Entrepreneur, other sources I continue to use are Startup Grind, Cloud Kettle and TechFaster. These directories of free and low-cost resources have helped me create everything from a business plan and the legal structure to contracts and basic operational processes. In return, I’ve been able to do more with little or no money that previously I thought I needed an investor to provide.
3. Save where you can.
I also looked to save money other ways by bringing in freelancers and outsourcing tech staff that could help me build the solution I had envisioned. Many entrepreneurs think saving money means doing it all themselves or having to trade equity to get the talent. In reality, because I looked for ways to not spend money elsewhere, I had some available funds for bringing in this temporary talent to do the things I wasn’t an expert at.
There are so many sites that serve as marketplaces for meeting the best talent around, like Toptal and Upwork. It turns out that, once I got Due going, many of these freelancers have stuck it out with me and I’ve been able to give them regular work. This has been a win-win and something more entrepreneurs really should do, because my labor costs are low while tapping some of the world’s best talent.
4. Find the right co-founders.
Lastly, having co-founders also provides a strategy for avoiding funding the startup with investor money. While it means relinquishing some control, when you find co-founders who share your vision and want to take the business in the same direction, you have the best of both worlds. I was able to share the workload and divide up the sweat equity that comes with bootstrapping while maintaining greater control over the strategic direction. There’s also built-in emotional support there when issues arise and more brains directed at seeing how to solve those barriers.
While this strategy may not work for every startup, it does offer a proven way to work around relying on raising money. And, when you have your personal finances in order, establish good credit and tap into the various accelerators and incubator programs available, you will realize there are so many more pathways to startup success than hunting down an investor who may give you money but may take over your “baby.”