by Frank Gruber
Jenn Lim
As a consultant for Zappos, Jenn Lim created its famous Culture Book in 2005 and has produced it annually since. In 2010, she helped Tony Hsieh launch and market his book Delivering Happiness: A Path to Profits, Passion, and Purpose. They did a cross-country bus tour, then spun off a separate company called Delivering Happiness. Lim now runs it as CEO and chief happiness officer, and the company offers events, coaching for businesses, and inspiration to make the world a happier place. Before Zappos, Lim worked as a consultant in the digital, writing, and graphic design industries.
You get the idea. The purpose of this list is to give you purpose. Post it on your wall. Have it handy whenever you feel down or are in a rough spot. “When I'm having a bad day, when it's raining, I just come back to, Why am I doing this stuff? And who am I working with? And that just brightens me up because I feel lucky,” says Jenn Lim, CEO and chief happiness officer of Delivering Happiness.
Boulter agrees that startups are a mental game. He urges you to “prepare yourself mentally for the process. It will take a lot of will to power through those tough times when you are strapped for cash and have $1,000 in the bank to last…the month.”
For example, Collis Ta'eed and his wife spent all their savings and credit lines on starting Envato, an ecosystem of sites that help people be creative. In the process, they got kicked out of their house and lived with their in-laws, then borrowed money from their parents to keep their dream alive. “When we finally launched our first product, we were running on fumes! It was very humbling and rather terrifying. But we got some early sales, kept doing freelance work to keep the lights on, and eventually things took off,” remembers Ta'eed.
So if you're planning on bootstrapping, just be ready—it won't be a walk in the park. Bootstrapping is an up-and-down roller coaster as you bring your dream to life. You'll likely be making sacrifices for weeks, months, and sometimes years. Perseverance, patience, and a calm mind will help you through the tougher times.
Celebrate: Enjoy the Journey
Bootstrapping may be hard, but it doesn't mean you can't celebrate and have some fun along the way. In fact, it's all the more reason to make sure you are enjoying the journey! I remember back in college when I didn't have a real job or real income yet, but I was able to make do with what I had—great friends and experiences. And you can do the latter economically.
When Jen and I took our Kauai workation, we did it on the cheap. We used airline miles for free flights, and I negotiated a lower rate on a house because it was winter (rainy season) in a more rural area versus a touristy one. We hit the grocery store and made our own meals, saving us from paying resort food prices. At that time, I was personally writing five or more articles a day for the site. I posted this on my @FrankGruber Twitter account on December 10, 2010, at 1:16 PM Hawaii time:1
Ok five articles written…break time…going to explore the island a bit. Aloha.
Taking a trip to Kauai might not make sense for you, but there are lots of options: head to a local beach, host a team talent show or bowling tournament, or go away for a long weekend in a nearby area. More simply, take some time to go for a walk and feel the sun on your face. Take a night off and be social. I'm very serious when I say that these minicelebrations of all sizes are critical to keeping your morale up and staying motivated as you hustle to get your business going.
Ta'eed of Envato had a tradition of taking a break by going to the mall, getting coffee, and talking over plans for the business. “It's such a feeling of possibility when you're starting out, and having cofounders (who in my case were my wife and best friend) is a really fun way to dream big together. Years later we still laugh about the days when the mall was our meeting room.”
Aaron Schwartz of Modify Watches saves little pieces of customer feedback. He puts handwritten notes on the walls, and he also keeps a folder of nice e-mails. Every week, he sends an e-mail to the team with the latest positive customer feedback, delivering a little joy to their inboxes. It's celebration, at no cost at all.
Finally, celebrate living the dream and doing it on your own terms! Bootstrappers should be proud of themselves. There are sure to be big ups and downs, but the ups mean more to you when you're working for yourself.
Final Thoughts
After launching Basecamp, Fried's company was approached by almost 30 venture capital firms wanting to invest. Finally, in 2006, he took funding from Jeff Bezos—not for the money, but for the wisdom. But Basecamp retains the bootstrapper ethos. Following in their footsteps should keep your company focused and not doing things just because you have the money to do them.
Jeff Bezos
Jeff Bezos is the founder and CEO of Amazon. Founded in 1994, Amazon started as an online bookstore (its first book sold in July 1995 was Fluid Concepts & Creative Analogies: Computer Models of the Fundamental Mechanisms of Thought). Amazon's mission is to be “Earth's most customer-centric company where people can find and discover anything they want to buy online.” The Seattle company went through an initial public offering (IPO) in 1997, launched the Kindle e-book reader in 2007, and debuted the Kindle Fire tablet in 2011. Amazon now has more than 97,000 employees and sells millions of products.
In 2000, Bezos founded a spaceflight startup called Blue Origin. Its goal is to make space travel cheaper and safer, and it's currently working on suborbital and orbital technology. In 2013, Bezos personally bought the Washington Post for $250 million.
Fried believes the best way to celebrate while bootstrapping is to give people their paychecks. Beyond that, when they launch a new feature, Basecamp configures its software so a message is sent into their chat room whenever someone makes a purchase, alerting the team to the total sold since the feature launched. This gives everyone an intrinsic motivation boost and a feeling of progress.
“It's important to celebrate every sale, every customer's name, every customer's location, as much data as you can share with the rest of the company—let people know that this stuff is working. A lot of companies will have a cash register sound tied to their ordering system, and those little things really matter because people are working hard, and then they know their hard work is paying off. And that helps a lot more than a party,” Fried explains.
1 https://twitter.com/FrankGruber/status/11921920773591040
Chapter 15
Funding
Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.
—Ayn Rand
In 2010, Tech Cocktail rented a house in Austin, Texas, during the SXSW Interactive conference. We had a few extra rooms, so we sublet our space to a couple of different sets of entrepreneurs. The team of Travis Kalanick and Ryan Graves were testing the concept of an on-demand black car service for the week, which would turn into UberCab and then eventually Uber. We sublet the other part of the house to New York–based entrepreneur Dave Lifson, who was starting a social media management platform called Postling. Lifson cofounded the startup with Chris Maguire and Haim Schoppik, cofounders of Etsy.
Lifson was on a mission at SXSW, and it was not to see how many Texas-shaped waffles he could find (although that is something to enjoy and be proud of—I love those Texas-shaped waffles). Instead, Lifson was on a mission to meet angel investors and raise seed funding for Postling.
Before SXSW, Lifson had created an AngelList application, sent it out, received a bunch of introductions, and been funded by David Rose and Chris Yeh. But Lifson knew that social media management tools were changing quickly, and they needed to change direction. So they pivoted, and then resent the AngelList application in hopes that the social proof of having investors would lure in a few more investors—and it did.
In Austin, Lifson wanted to meet with as many investors as he could. He leveraged some of his AngelList and personal connections to talk with Tom McInerney, who decided to fund the project after 30 minutes. McInerney then referred Lifson to Paige Craig, who was in and also pulled in Dave McClure. Once w
ord spread, Thomas Korte joined and Lifson was introduced via e-mail to investor Kal Vepuri, who was also at SXSW. After meeting up in person, Vepuri was in. Lifson then met with our old pal Gary Vaynerchuk, who also joined. Techstars cofounder David Cohen finished off their round. In six days, this amounted to $200,000 raised in Austin alone, bringing Postling's total seed funding to $350,000.
I like to think we gave Lifson a little extra Tech Cocktail luck, since he stayed with us that year. But a few other things actually helped make Postling so fundable to all these angels. First, Postling had a great founding team, with experience building products at Amazon and Etsy. Second, by pivoting and changing their product focus, the founders had shown in their short existence as a company that they could respond to feedback quickly. Third, Lifson was able to quickly articulate a compelling vision backed by domain expertise.
Finally, Postling took advantage of the then-new AngelList to find and connect with angel investors. AngelList has since become the de facto way to raise angel funding. Lifson and his team also leveraged both online and offline networks to help build relationships, using Twitter, LinkedIn, and more. They didn't cold e-mail investors; the investors that signed on became supporters and gave them warm introductions to others.
This chapter looks at your funding options (beyond just the angels that Lifson used), how to pitch to investors, how to find the right investors for you, and how to structure the deal once it's finally in the works. Let's start by looking at different funding options.
Funding Options
Debt financing: Bank loans are probably the most well-known debt financing option other than credit cards, but depending on the amount, they can be difficult to obtain as a new startup. Loans can be a good funding source when you need working capital or equipment. Working capital is funding to tide you over between customers ordering and you actually getting paid. And when you buy equipment (such as a server), the purchase acts as collateral; the bank can seize the server if you don't pay them back. Later-stage startup companies can secure a type of loan called venture debt, which is paid back after about three years. With bank loans, you keep your equity but pay interest. Other debt financing options include loans available from the Small Business Administration, accounts receivable lines of credit, and nonrecourse invoice factoring options (the latter two provide financing by converting accounts receivable to cash).
Government funding: If you're a high-tech startup doing heavy research and development, check out options such as the Small Business Innovation Research grants ($150,000 to $1 million) through organizations such as the National Science Foundation and others, FederalGrants.com, and programs by your city or state government. The benefit of taking a government grant is that you don't have to give up equity. The downside is that it's very competitive. Another drawback is the timeline: most government programs have very strict schedules for submitting grant proposals and doling out funds. This window may be at least 90 days, which means you could apply and not hear anything for a few months.
Friends and family: If you have friends and family willing to support your dream, then you might want to take them up on it. A friends and family round of funding is usually in the tens of thousands of dollars (although I once met a startup team in Dallas who raised a friends and family round of $6 million—I'd love to meet their friends and family!). Remember, they may not realize that most startups fail. Whatever amount they give you, make sure they can afford to lose it.
Angels: Angel investors are a common starting point for equity funding. No, they don't have wings—but they can help give your startup wings. Angel investors are individuals who invest their own money, usually tens or hundreds of thousands of dollars. Angel investors who invest larger amounts are sometimes called super angels. In many cities, you'll find angel investor groups where angels get together to listen to pitches and make investments.
Compared with venture capitalists (VCs), angels typically offer less complicated and friendlier terms for entrepreneurs. That's partly because they invest for different reasons: whereas VCs are working to get a return for their own investors, angels often just want to give back and help the community. Getting angel funding can also be a faster process, as we saw with Postling. That said, angel investors will likely want some involvement in your company to help guide it toward success.
Venture capital: If you're looking for millions of dollars in funding, the classic venture capitalist is whom you need to call. VC firms manage money from other people (called limited partners) and make a percentage of return based on the success of the fund's portfolio companies. If you go down this path, it's an entire world you'll need to study up on. Different VCs invest in different types of companies—by stage, geographic region, or industry. There are VCs with good reputations and those with bad ones. Many people compare the relationship with your VC to getting married, as you're tightly coupled with them for the long haul. VCs are looking for large returns in a fairly short timeline, so keep that in mind.
In addition to money, your VC should be a valuable source of guidance and connections, which can help you tremendously. On the negative side, funding terms are usually more complicated and less entrepreneur-friendly than with angels, and most VCs want to be more involved in operations. Also, raising funding from VCs usually takes longer: they have a thorough due diligence process and just more cooks in the kitchen along the way.
Rewards-based crowdfunding: With the rise of sites such as Kickstarter, Indiegogo, and many others, you can now get your startup idea funded by the masses. Crowdfunded products can raise anywhere from a few thousand dollars to millions of dollars. It's called rewards-based crowdfunding because your backers are rewarded with a small trinket that may range from a T-shirt to a copy of your product or creation to an exclusive experience, such as dinner with the founders.
Aside from the funding itself, crowdfunding is a great marketing tool and a way to validate your idea to future investors. The great part is that these rewards-based funding platforms do not give away equity in your company. Just understand that not all platforms are created equal. For example, Kickstarter is all or nothing, meaning if you don't meet your goal, you don't get any money, but Indiegogo allows you to keep anything you raise. On Kickstarter, 56 percent of projects fail, receiving zero funding.
Crowdfunding can generate lots of enthusiasm and support, but it can also generate backlash and annoyance if your product is delayed. You may raise more money than you intended, which means you'll have to ship more products—a good problem, but still a problem.
Equity-based crowdfunding: Thanks to the Jumpstart Our Businesses Startups (JOBS) Act in the United States, entrepreneurs are now allowed to raise funding from nonaccredited investors (people with less than a $1 million net worth or $200,000 in annual income). Before, regulations would have made this kind of fund-raising prohibitively expensive and time-consuming. The JOBS Act was signed in April 2012, and the Securities and Exchange Commission (SEC) proposed rules for crowdfunding in October 2013. A comment period followed, and the official rules will likely go into effect spring 2014.
Startups can raise up to $1 million per year under the crowdfunding rules. Many sites will support the new crowdfunding option, such as FundersClub, AngelList, EquityNet, Wefunder, and StartupValley. Equity crowdfunding comes with regulations on startups, such as reviewed or audited financial statements, background checks on executives, and an annual report to the SEC, which are not mandatory for angel or venture funding. Crowdfunding is a big opportunity, a big challenge, and still a big unknown.
Accelerators: In the past five years, there has been a startup accelerator boom. But some of the first startup accelerators, such as the AOL Greenhouse, which launched Motley Fool and the Book Report Network, started long ago in the late 1990s, as playgrounds for innovation at big companies.
What is an accelerator today? A startup accelerator offers entrepreneurs a chance to spend a few months intensely focused on their product and business—fueled by funding
and mentorship and often in shared office space—before pitching in front of investors at demo day. Most accelerators offer between $15,000 and $20,000, but some programs offer a convertible note on top of that.
The recent startup accelerator trend started with Y Combinator, founded by Paul Graham, Robert Morris, Trevor Blackwell, and Jessica Livingston. In 2007, David Cohen and Brad Feld founded Techstars in Boulder, Colorado, putting the city on the startup map as a place incubating and funding early-stage startups. The Techstars program has since expanded into a number of cities and niche verticals, and hundreds of other startup accelerators have emerged.
For more information on choosing the best startup accelerator, read Tech Cocktail's Guide to Startup Accelerators (see http://tech.co/book).
Paul Graham
Paul Graham is the cofounder of Y Combinator (2005), the first and now most prestigious startup accelerator. Silicon Valley–based Y Combinator has funded more than 450 startups, and more than 100 other startup accelerators have sprung up in its wake. Graham was a Lisp programming language expert and the cofounder of Viaweb (acquired by Yahoo! in 1998), which is claimed to be the first software as a service company. He writes well-regarded essays on startups at PaulGraham.com.
Hybrid programs: A few organizations are adopting a hybrid model that has some similarities to an accelerator: funding, mentorship, and office space, without the demo day. Bloomington, Indiana–based SproutBox, for example, provides some minimal funding to startups in exchange for equity and mentors them over 10 months. Accepted companies start the program at different times during the year.