How To Start A Business — Savings, Investors, Or Slow And Steady?

 Photo Courtesy of  UNCG Research  / Creative Commons/ Flickr

Photo Courtesy of UNCG Research / Creative Commons/ Flickr

There’s always a tradeoff — the rules of starting your own business.

Recently, a friend asked me why I chose to start my business the way that I did — bootstrapped.

Since 2012, I have been running an organically-grown business in the midst of Silicon Valley’s “I need to raise a round of funding” culture. DC Design is my second company. I’ve been building it for 5 years. What we started with is incredibly different than what it is today.

I believe one of the biggest fallacies in Silicon Valley is that you need someone else’s dollars to make your vision come to life. We’re living proof of that.

Silicon Valley VCs have made it clear that founders must devote 110% of their time to the company. But that perspective serves the VC’s interest, not necessarily a founder’s. So then, why don’t VCs put all their eggs in one basket? Why diversify with such expansive portfolios? Because putting all your eggs in one basket is not investing, it’s gambling.

It may be time to look beyond the Valley for inspiration, support, and funding.

I’ve built a business that gives me the freedom to focus on and address any problem in the world. Today, our work involves redesigning aspects of the foster care system, walking alongside governments to develop their strategy for jail reform, designing products for those with disabilities, and teaching others to solve complex problems through our educational workshops. We are a social impact design consultancy, but we didn’t start off that way. Our story instead began with a Kickstarter campaign, operating a 600 lb. industrial laser cutter from my bedroom, and tutoring a lot of high school students. For more on that story, check out our site.

The focus of this post is to detail the three approaches you could use to fund your business and the tradeoffs you make along the way. What I want to emphasize right away is that regardless of which one you choose, each one requires a sacrifice.

Just remember, for every action, there is an equal and opposite reaction. For every benefit, there is something to be paid. The first rule of alchemy is, you cannot gain something for nothing. Bottom line: there is no shortcut.

For those looking to start, here are the pros and cons of each approach.

 Photo Credit:  Thomas Galvez / Creative Commons/ Flickr

Photo Credit: Thomas Galvez/ Creative Commons/ Flickr

Model 1: Raise Money

Pros:

  • Speed: you can quickly buy all the equipment you need to get started.
  • Hiring: Can hire people early on and compete on salary with other well-paying companies in the area from day 1. This may allow you to go from being a one or two person shop to having collaborators right away.
  • Network Effect: You can leverage the knowledge, expertise, and network of your investors from an early stage.
  • Credibility: Your company will likely pick up what I like to call, “external indicators of success.” These are the metrics society uses at a glance to tell whether you’re successful and worth listening to.
  • Quick Win: You could make it big quickly and be flushed with cash at a young age.

Cons:

  • Distractions: Spend a lot of time focused on keeping your doors open while you try to convince others that they should believe in your vision enough to give you money. This means you spend 3–6 months of your year focused on getting investors — who are not your customers — to see the value in your vision instead of getting your potential customers — who are in fact the people who would pay you for your service or product — to see the value in your vision.
  • You give up control. You lose the ability to make all decisions on what your company will and will not do.
  • Becomes harder to experiment, especially if your investors are risk-averse.
  • Building a business requires continuous tinkering with the business model. But with this model, you scaled up quickly and now need to maintain the machine you’ve built. As a result, you often have to go back to your investors and convince them they should give you money for the newest approach you’re going to take.
  • When the only tool you have is a hammer, everything looks like a nail. Instead of thinking creatively, there is a tendency to throw money at the problems that arise.
  • You’re pushed to scale faster, but can you be sure you’re scaling the right thing?
Tradeoff: Long periods of unfocused time spent wooing your “not customers” in exchange for the ability to scale faster and gain social credibility.
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Photo Credit: Perzon Seo / Creative Commons/ Flickr

Model 2: Work for a few years, build your savings, and use that to start your business.

Pros:

  • You get to focus 100% on your core business and developing your business model.
  • You may be able to run for a year or two without needing to convince anyone else that your ideas are worth their investment money.
  • You maintain control over what you focus on and can feel free to take risks because it’s your company.
  • Get to market sooner
  • Hire team earlier
  • Get to proof of concept and then take on funding. As an investor in your own idea, you may be able to maintain more equity.

Cons:

  • You might just run out of time. Most companies change their business model, product offerings, and overall direction during their early years. With this model, you have a clear deadline by which you need to have built a sustainable business. Often that timeline is shorter than needed. I’ve seen so many businesses started this way go out of business because the founders ran out of money before they could prove their model.
  • You burn through your own money and if you fail, you may end up right back where you started before you took that well-paying job in the first place.
Tradeoff: Sole ownership and freedom to define the business as you want it — though you’ll be cash-strapped.
 Photo Credit:  Tax Credits  / Flickr/ Creative Commons

Photo Credit: Tax Credits / Flickr/ Creative Commons

Model 3: Don’t quit your day job. Slowly build a business with alternative revenue streams.

AKA: Do business today to do business tomorrow.

For instance, I operated the laser cutting machine from my apartment and produced over 100 laser cut and engraved world maps for my Kickstarter customers. While this industrial machine sat next to my bed, I created a yelp page to advertise my services and began fielding orders for contract laser cutting and engraving jobs.

In this model, you always maintain a source of income that can provide for your basic needs in life. Keep the day job; get a part time gig, or do some consulting. In my case, that meant tutoring and mentoring students in the Bay Area for 3.5 years until I could start drawing a salary. With this model, almost all the money you make from the business should go into the company savings account and be used to help the company grow.

Pros:

  • You don’t have to beg others for money to support your idea.
  • You have time to test out different ideas before you settle on the idea that makes the most sense.
  • Your company can literally fail, and you can try again with something else without having to go back to working for someone else full time.
  • You build a business with a real foundation. These types of businesses don’t have a ton of money to throw at problems. They don’t have marketing dollars or millions to hire expensive employees. That means when you learn how to make money doing something, that money is real. It is based on actual validation.
  • Those who choose to work with you early on are the people who believe in your vision vs. the external indicators of success or allure of the big startup pay check.
  • You can be more methodical about which projects you take on, what products you choose to create, and where you apply your talents.

Cons:

  • You may spend time doing projects that don’t align with your final vision.
  • Growth is typically slow.
  • When you are ready to hire, you need to compete against better paying competitors for those same employees.
Tradeoff: Sole ownership with the opportunity to experiment but time-consuming process. Cash vs Time.