The slippery slope of startup funding

14th April. SocialHelpouts office. 11 pm.

Nikunj: Guys, we need to pitch in VC round table tomorrow morning. Can we make a funding deck tonight?

Anubhav (rolls his eyes): We are raising funds?!

Nikunj: Not really. I had filled up an application form for a pitching event. They shortlisted us.

Vinit (opens a pitch template): Guys, we need to put in a funding amount. How much will we need?

Nikunj: I think we can do with $250K.

Vinit: I’ve heard that no matter the amount, the investors will take 15-20% stake. How about putting 1.5 million?

Anubhav: Better. But how will we justify the spend?

Nikunj (pulls a rabbit out of a hat): We need to hire 4 engineers + 2 marketers + 2 support/sales. To house them, we will need more office space and yeah we could also run some ads.

Vinit: That still won’t use up 1.5 million.  Let’s hire more in tech to build a mobile app and validate other verticals we want to attack.

That’s when it hit us. We were going down the all familiar slope so many startups have gone down before.

The mistake is common. Raise huge funding just because it’s available and then figure out ways to spend it on things like nonviable discounts (like Foodpanda), overhiring (like TinyOwl), crazy marketing blitz (like Housing.com) & funky parties (like Stratton Oakmont).

So we reminded ourselves again. When we raise funding, we would:

  • Raise only the amount that we need. In return of a smaller stake.
  • Raise more if investors really insist, but let make clear that the money would remain unused in the near future.

Will this work? Would love to hear experiences from those who have tried doing something similar.

(At SocialHelpouts, we are disrupting job boards by noiselessly connecting startups with the right people. Our first milestone is reaching 250K users and we are sharing our journey on our blog. Read more posts: why we didn’t raise funding early on and these are our hiring lessons)

Why we didn’t raise funding early on

 

race-for-funding

Are you guys funded?

Everyone loves to ask this question. People at startup events, college buddies on WhatsApp groups and even co-passengers on flights.

And sure, I get it. In the world littered with umpteen startups, funding reflects a certain external validation and “seriousness” of your venture. So nothing wrong with this question, really. But what gets to my nerves is the way the conversation goes next:

I: No, we are bootstrapped.

The guy: Uh oh. Yeah, funding is a big problem these days.

Wait a minute. I only said we are bootstrapped.  Did it automatically imply that we failed at raising funds? Is raising funds the only way to build a startup?

Of course not. There are many successful startups that bootstrapped to success including the likes of Mailchimp and GitHub. But these are heady startup days and most people equate “funding” with “success”. In an emotional post recently, Sumanth Ragahvendra put it this way:

We no longer care about what a startup has achieved or aims to do, the problems it solves, the benefits it provides or the impact it has had.

We only care about one thing — how much funding has a startup raised. And that amount determines where you are slotted in the startup caste system…

At SocialHelpouts, we decided to skip raising funds early on. Our product idea could be applied to many markets and we were not sure which one would work out better. And even after choosing a market (“network hiring”), our biggest task was to figure out what problems we would solve best for which segment of that market.

At early stage, our biggest task was to choose a market, test it and find our sweet spot. Funding was not going to do it for us – we had to do it ourselves.

So in last 10 months, we evaluated different markets problems and experimented with different solutions to tackle them. We played with positioning and tried different ways of acquiring our users. Along the way, we worked on creative initiatives such as easyConnects, helping laid off employees form PubMatic and Foodpanda and doing highly focused hiring events such as JoinTheRocketship. These things not only helped us test different approaches to solving problems but also helped us identify our own strengths and weaknesses as a team.

Yes, angel funding exists to solve exactly this purpose. But finding a good angel can still take months and cause distraction away from the much needed customer discovery process. We had sufficient funds of our own that we found more convenient to dip into.

But let me add some caution – bootstrapping can be hard. Expenses on even simple things like hosting and office space can add up quickly. The reasons we have been able to do this are:

We had a lean and cross functional team: We have had only 3 full time employees to cover the entire gamut of operations – development, marketing and support. We all believe in our mission and are happier with more equity than cash.
We had sufficient funds to last 12+ months: This is not about just surviving 12 months. You should be able to provide a great experience to your users. For instance, we spent a disproportionate amount on our website infrastructure, customer experience (Intercom!) and an air conditioned office that kept our team productive.
There was a tangible path to revenue: We were operating in a proven market with a clear revenue potential (hiring companies). Companies will pay for a hiring product that helps them hire, there was never a doubt about that. To at least survive, we just had to build a decent enough product.

Your situation might be different. May be you need to raise funds early or may be you need not. But whatever you do, please don’t just assume you need funding because everyone’s seems to be raising it.

What do you think? Do you think startups are focusing more on getting funded than working on achieving product-market fit?