While choosing to forego outside investment can leave your business more susceptible to the ups and downs of the market, it can also be exhilarating to be in complete control of your professional destiny. Your ascent into the upper ranks of your industry may be slower than if you were bolstered by outside funds, but you have the freedom to determine each step in your path.
There were two main reasons my company decided to fund ourselves independently. The first — and most obvious — reason was ownership. Every founder starts with 100 percent undiluted ownership. Outside funding chips away at both ownership and emotional investment as you trade equity for investment; sometimes young entrepreneurs give up too much too fast. I know plenty of CEOs who sold out too early.
The second reason we wanted to support ourselves was the freedom it allows, though it is a double-edged sword. Having the freedom to determine our direction enabled us to exit certain profitable industries when it became apparent consumers were no longer receiving value. Without investors, it was easier to shift directions. In our case, closing one door opened a new one that may have remained closed to us had we been restricted by outside agreements and opinions.
However, there are trade-offs. When it’s all on you, the pressure is enormous. To succeed, you have to get creative about cash flow. Our solution was to work with our bank and leverage our receivables. That way, we could borrow based on a percentage at any time. Depending on the contract, our customers can pay us anytime from net 30 to net 90 days. The ability to borrow against our receivables has helped take the pressure off the day-to-day cash flow.
Getting Creative: The Secret Behind Successful Self-Funding
Constant creativity is necessary to navigate the tight budget of self-funding. I take every company expense — from office space to the coffee we have in the break room — as a challenge to secure amazing deals and promote future growth.
Here are three ways to creatively and effectively grow your startup without relying on money from outside investors:
1. Don’t ask friends and family
Betting your own money and losing it to strangers is difficult, but losing your friends’ or family’s money is an even bigger pressure you don’t need. Instead, be relentless about making only deals that make economic sense. When using your own money, you simply don’t have the luxury of taking deals that aren’t profitable to some degree.
When our building owner wanted a percentage each month that we couldn’t afford, I applied a little creativity to the negotiation. We came away with a lease that enables us to pay less in the early years and make increased payments toward the end. It frees up money today based on the projection that we’ll be making more money in five years.
2. Get inventive to get what you need
Operate under the principle that it never hurts to ask. When funding your future is all up to you, the need for habitual frugality makes you come up with creative questions to get what you need.
We’ve asked for different things — all of which enabled us to free up money. For example, I went to our customers early on and asked them to pay sooner in exchange for discounts. We also asked our media sources for larger credit lines so we could do more in the short term. We even vet our partners and credit the same way a bank does. If it weren’t my own money on the line, I’m not sure I would have done the same.
3. Be a good neighbor
Lift your head up and think beyond the day-to-day. It’s not always easy to find the time, but getting engaged in your community not only helps you network, it also pays dividends.
Our company is a member of the Downtown San Diego Partnership, and our involvement is about the bigger picture, not our own company. Being part of the organization, which is working to revitalize downtown San Diego, is a long-term investment for us. As the organization succeeds, our business benefits from the greater community building a favorable environment for startups.
Electing to go without outside investors isn’t right for every startup, but I recommend giving it some serious thought. It keeps you focused on the bottom line around the clock — and that’s never a bad thing.
BusinessCollective, launched in partnership with Citi, is a virtual mentorship program powered by North America’s most ambitious young thought leaders, entrepreneurs, executives and small business owners.