If you are searching for the best startup booted fundraising strategy, you will want to learn more about developing the fundamentals of your business while remaining lean in order to maintain control and grow responsibly in addition to raising capital through outside sources to help accelerate your growth rather than survive without them.
Introduction to Startup Booted Fundraising Strategy
Founders in the startup ecosystem frequently feel like they have to choose between either funding everything with their own money (bootstrapping) or finding investors as soon as possible. Usually, the best option falls somewhere in between. Having a strong Startup Booted Fundraising Strategy for a startup gives the founder the opportunity to create a successful company with limited resources, validate their business model, demonstrate demand for their product, and time their fundraising efforts appropriately so they have a true competitive advantage over other startups.
What Is a Startup Booted Fundraising Strategy?
A startup booted fundraising strategy could be defined as a funding strategy where a founder executes their startup strategy with minimal or no outside financing first. By executing a bootstrapping strategy (either self-funding through personal savings, revenue from customers or a minimal amount of ‘internal’ financing), they will learn how to grow the business successfully prior to fundraising from outside investors. This creates a much stronger position in front of outside investors since the founders have some level of proof that their company is progressing, has some level of traction, and has demonstrated disciplined decision-making.
The Importance of This Strategy Today
Fundraising in today’s environment has shifted to offence, with emphasis on how companies prepare and operate efficiently versus relying on buzz. Investors are paying more attention than ever before to key metrics such as cash flow, ownership structure, runways, and how founders will utilize their capital. It also explains why bootstrapping has become a stronger fundraising strategy. Startups that demonstrate stability, adaptability, and the ability to get results using minimal cash have a greater degree of appeal as investment opportunities than companies that generated large amounts of funding early in their development without having first established fundamental business principles.
Leverage Through Bootstrapping
Bootstrapping is not just about saving money; it creates leverage for the future. Founders can build upon their customer revenue generated by practical business activity, efficient hiring, and a focus on building quality products. Securing that degree of negotiation leverage from an investor occurs on the basis of operational success having already been demonstrated, thereby substantially reducing the inherent risk for the investor. In these situations, the choice to fund with venture capital is viewed based upon business growth efforts rather than as an attempt to survive.
Raise to Accelerate, Not to Survive
One of the most important parts of any fundraising strategy for new businesses is bootstrapped funding. Ideally, a business should seek outside funding for acceleration rather than as a way to avoid going under. Out-of-the-box capital can help an existing business accelerate hiring, distribution, technology, and market entry provided the business is already showing strong demand for its product/service, solid customer traction, and proof of a viable business model. Conversely, if a bootstrap business is raising money because it has no viable path forward, investors can often sense this weakness and will generally move quickly to avoid investing.
When a Bootstrapped Startup Should Fundraise
A bootstrap startup should consider seeking outside financing when it can show that by obtaining capital, it will experience accelerated business growth. Usually this is accomplished if the startup can prove through metrics that there is at least some visible customer demand, some form of predictable revenue or usage pattern and a solid understanding of how new funds will be utilized. Investors also want to know what milestones will be achieved as a result of this funding (i.e., how much runway it will create), and why the timing of the funding request to the investor should occur now rather than later.
Signs You Are Ready to Raise
There are numerous indicators that a start-up can begin fundraising instead of continuing to bootstrap.
- You possess traction versus just ideas.
- Your customers are purchasing, remaining, or choosing to repurchase.
- The way you acquire new customers is starting to become increasingly predictable.
- You know your numbers and runway.
- The legal structure and ownership are clean.
- By raising capital, you are looking to grow a proven business model as opposed to merely testing out a random idea.
These indicators will lend you and credibility during discussions with investors and have the potential to increase the productivity of such conversations.
Build Traction Before You Pitch
Traction is typically equivalent to bridging the gap from a fully-owned business to an actively-fundraising company. Traction substantiates the claim of sale as a potential seller. Without traction, the founder will be pitch-selling success. As a result of having traction, the founder will be pitch-selling evidence of success. Traction differs in many regards: revenue-generation, retention, product-use, pre-orders, partnerships, pilot programs and customer wait lists. Regardless of what form it takes, it must demonstrate how the market has received the business in a re-occurring fashion.
Maintain Clean Capitalization Table.
A clean capitalization table (cap table) is one of the most undervalued components in securing startup financing. Investors are interested in the following factors in relation to the cap table: who owns what?, how much capital has already been diluted from the ownership of the previous investors?, and whether the Cap Table correctly reflects any previous agreements? The need for a clean cap table is even greater for bootstrapped, or self-funded, founders. This means that especially-with-the-lean-business-model, it is often assumed that founder’s businesses are informal in nature within their own company.
Having an organized and well-established ownership structure will present the opposite message to potential investors; this being that the company is organized, disciplined, and ready to accept the next level of investment.
Understand Dilution Before Raising
It’s essential for every founder to fully comprehend the impact fundraising has on their equity and how having a smart bootstrapping fundraising strategy could potentially change the way they view their own company. Part of this process involves building models around the possible round sizes, valuations of the business, and future financing scenarios and how each will change the founder’s level of control over time. Understanding how these factors will affect once you have a level of control, and how your level of control will change with each round if you do raise funds to maintain or increase control.
Decide How Much to Raise
One of the biggest mistakes a founder makes when fundraising is raising a number that sounds impressive to them, rather than raising the amount that is needed to grow or sustain the business. When building the bootstrapping model, being specific and creating an accurate amount that you require to create adequate runway to reach the next major milestone for your business is FAR more critical than what you think might be a good number to create your own ego.
Use Capital for Clear Milestones
Investors are looking for answers on where to invest or how their capital will be spent – they will want to know what every single dollar spent will result in (i.e., a specific type of return). To do this, it is important for founders to show that there is a direct correlation between the capital and defined milestones that can be measured against performance (aka “milestones that are measurable”). For example, instead of defining a vague objective of “growing faster,” a solid plan could be made based upon achieving specific milestones such as hiring two additional employees or creating one new product feature during each period of investment; this allows investors to feel that the capital raised will be used for specific purposes and not wasted on unnecessary expenses (this is especially true for bootstrap-formed businesses).
Consider Flexible Form of Funding
Startups do not necessarily need to jump directly into a traditional priced equity round. Many flexible funding structures can fill the gap between bootstrapping and a larger raise. Examples would be small interim financing, convertible instruments (such as notes or SAFEs), or any other structure(s) that allow the Founder(s) to continue to maintain momentum while waiting for a longer timeframe with increased traction or delivering a better valuation environment. The important thing is that founders will use these tools wisely, and not as a way to postpone making difficult decisions forever.
Selecting the Best Investor
When raising a bootstrapped startup’s financial resources, you must also consider the importance of who you are raising the funds from (i.e., what kind of investors you want). Investors who value performance-based investment (i.e., you will receive $100 in return for your $1 back) are not necessarily the best fit for your company just because their name is bigger than yours. The investor that has the same understanding and expectations as your company’s operational style, market, and pace are usually the best fit.
Begin Relationships with Investors Early
Having a more established relationship with an investor makes the fundraising process smoother and quicker compared to not having as much connection to them prior to the fundraising round. You can build your relationships with investors through consistently communicating updates of your company to the investor, reaching out for constructive criticism, and allowing for the investor to follow the company’s progress (over time). This allows for the investor to become comfortable with the founder prior to asking for funding, but also provides a history of execution (orb of consistent execution) to assist in securing funds.
Create a Realistic Pitch Deck
The pitch deck should be more than tantalizing; it has to answer the following questions honestly and accurately: What is the present (the Problem)? What’s the future (solution)? What’s the size of the market? What facts demonstrate the viability of the company? What’s the estimated growth rate? How will the funds raised be used?
A Founder who portrays an understandable level of difficulty in building the company is much more likely to be trusted by an Investor than one who provides unsupported extreme projections. Bootstrapped Founders typically have a better chance of meeting these requirements due to the fact that they have experienced the development process first-hand and exercised resource discipline throughout their experiences.
Ready Your Data Room Early
Preparing critical documentation prior to serious discussions with potential Investors can help secure funds more effectively. To have an organized data room, you will want to gather together your Company’s Financial Records, Articles of Incorporation, Ownership Agreements, Contracts, Growth Metrics and any other important documentation that may serve as the foundation of the Investment due diligence. An organized data room will ensure that you make the best use of Investor’s time and reduce their level of confusion about the success of the Investment Opportunity.
Maintain Cash Flow Discipline After Getting Funded
When a startup receives funding, it is tempting to drop the bootstrapped mentality and start spending aggressively. However, a successful Startup Booted Fundraising Strategy continues with how you: use money, track your performance, hire people and spend money. If you care about getting long-term backing from your investors, treat cash flow with respect, and do not let one successful round of funding be a reason to spend beyond your means.
Common Mistakes to Avoid
There are many different missteps a founder may encounter while employing a booted fundraising strategy.
- Fundraising too soon before having demonstrated any form of traction.
- Fundraising out of desperation.
- Fundraising from the wrong type of investor.
- Not having a clear cap table and understanding dilution.
- Raising Capital without having a use of funds based on milestones.
- Failure to maintain / enforce financial discipline following the fundraising round.
By making these mistakes, it will harm credibility and defeat many of the benefits the founder created through bootstrapping.
Why Bootstrapped Founders Often Have a Stronger Story
A funded founder’s development of an inspiring story is based upon his/her achievements with limited funding/showing the resiliency, customer-centricity, adaptability, and proof of success through actual results rather than through investment into the company. Investors find Stories inspiring because they show that both founders (and subsequently the startups created by the founders) can work successfully in both limitatively-funded and expansion-focused environments. In other words, there are foundationally greater expectations going forward from bootstrapped-startups that fund and operate successfully, i.e., they appear to be much more functional than simply looking like ambitious entrepreneurs.
Utilizing Bootstrapped Funding Successfully
Take, for example, a bootstrapped software startup that achieves a level of stable, recurring revenue on a relatively small and focused team with a capable level of retention and high customer demand prior to raising external funding. Upon an external raising effort, the entrepreneur can provide the investor with examples of consistent, positive product performance, as well as that customers continue to use and renew with the product, and therefore the funds raised in this round will be used to further develop the startup’s ongoing sales development, improve product onboarding processes, and expand the geographical markets being served. As such, the purpose of this round of funding will be to provide growth/spread of the startup’s capability to serve customers as opposed to providing funds to simply find the best path forward for the startup from a direction (development) standpoint.
Conclusion
The combination of Startup Booted Fundraising Strategy helps founders like yourself build, manage, and scale your company, while strengthening your control over your business through ownership.
You will build traction in your company, know your number and how to use them, align yourself with the right investor, and only seek funding when you have a clear plan for accelerating growth through your business. Balancing these two means of financing will often yield greater results than seeking funding too soon or bootstrapping your business for an indefinite period of time without a plan for scaling your business.
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