You’re Better off Without Investors, at Least at First

By

Chris Ronzio

on

July 31, 2018

This article is Tax Professional approved

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Editor’s note: This article is written by one of our longtime clients, Chris Ronzio.

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I’m 7 months into my newest company, Trainual, and I’ve got the credit card points to show for it.

When you’re funding a new business, it can be tempting to take on investment and give away a piece of the company. But, consider this.

If you believe in your company enough to sell your vision to an investor, why wouldn’t you invest everything you could in your business first? And I mean everything.

You may not have the cash to casually fund a business without breaking a sweat, and I didn’t either. But, when you focus on selling to customers instead of selling to investors, two things happen. You become more desirable to your eventual investors, and your valuation just keeps rising.

Here’s how I’ve delayed investment so far, and why I think it will pay off BIG.

Quit playing the someday game

I used to talk about “someday” too often. I’d say, “someday when we have $250k laying around, I’ll stop taking client work,” or “when I get a big payday, I’ll start funding my own projects.”

Well, if it’s money you need, stop playing the someday game, and quantify it. How much do you need to make a bet on yourself, if you’re willing to do it?

Just like any overly-dramatic house flipping show, be sure to give yourself enough of a buffer to spend more than you expect to. Round up, and be conservative, but find your number so that you can turn “someday” into a reality.

Back your message with your money

A mentor of mine told me that if I believed in my product, I’d be spending as much money as I could spend to tell everyone that I could tell about it.

So, do you believe in your business?

How much money have you spent getting the word out about it? How much did you spend last month on marketing?

When I did this exercise last year, the number was embarrassing. I had spent $150 on some promoted Facebook posts, and tickets to a networking event. How many people would even know I existed with that kind of budget? Not many.

But, the idea of backing your message with money extends beyond your marketing. If you are going to truly build the business that you are destined to build, you must be willing to invest in it, and to invest your own money.

When I came to this reality, I dug deep to figure out how much I could invest. I called all of my credit card companies to ask for limit increases, I talked to my wife, and I decided how many chips I could push onto the table.

I had investors asking to get involved, but I decided to fund the business myself.

Why not take investors sooner?

I remember when my parents would give me tokens at the arcade for my birthday. I didn’t hesitate to dump eight of them into the most expensive 30 second ride that I could find. Because it wasn’t my money.

But, when it was time to spend my allowance at the same arcade, I’d spend 90 minutes playing Skee-ball, because I wanted it to last longer.

The same is true when you’re building a business. The amount you have to spend (your available cash + debt), divided by the amount you burn each month (your expenses), equals the number of months that you can expect to last (your runway). And, like any pilot, you need a long enough runway to get off the ground.

I’ve seen entrepreneurs first-hand burn through investor money before they’ve even figured out their model. That leaves them hunting for new investors, which are harder to impress with your initial vision and lack of results.

So, I believe in making as much progress as you can before you involve any outsiders.

By experimenting on your own dime and figuring out your business model, finding your first customers, and refining your messaging, you set yourself up for a dramatically better valuation because you are removing a lot of risk in the business. And, even if you haven’t cracked the code by the time you reach the end of your own funding limits, you will have shown investors your commitment to the business.

The equity you dole out the earliest will be the most expensive equity when you exit.

If you want to avoid early investment like I did, let’s talk about where to find the cash.

How to get cash without investors

When I decided to move forward and invest in scaling my software, I had to scrounge for all the cash I could find. Proceed at your own risk, but here are some sources that I leveraged and considered.

Cash on hand

Obviously, if you’re sitting on a pile of cash, start here. As the entrepreneur, you must be willing to take a risk and invest your own money. If you can’t stomach it, go back to the drawing board and rethink your idea, because you probably don’t believe in it quite enough. While building your business there will be dozens of other decisions that will test your resolve and push you to take risks, so buckle up!

Do the work for your future customers

Trainual is a “do it yourself” platform where users can document every process in their businesses. Early on, it was natural to offer a “done for you” version of the service, where we actually did the work for the customer that the product would eventually help them to do. This way, we were able to solve the same general problem for our customers, but also learn and earn while doing it. Done-for-you services are a great way to connect with your target customers and fund your vision.

Credit cards

I had a lot of them, and didn’t hesitate to tap into my limits, mostly for advertising spend and other subscription costs that I didn’t need cash for. A bit of a warning here: credit card debt can be nasty to overcome. But, when your business is growing 2x, 5x, or 100x in that first year, even money at 16-17% APR might make sense to “borrow”.

Credit card checks

I used to always get those 0% interest balance transfer checks in the mail, and I would throw them away. Suddenly, I was reading the fine print. With these checks, you might be able to get 0% interest for 6-18 months, which is a lifetime in startup land. Use them to pay vendors or fund other costs as you get started.

Bank loans and lines of credit

If you have an existing business or revenue, consider applying for a loan to fund your early growth. Interest on loans could be 5-12% per year, which could be cheap money compared to the growth of your business.

Online funding

I’ve used services like Fundbox and Kabbage, which wire money to your bank account and kick off monthly or weekly repayments until the funds are completely repaid. The APR-equivalent interest rates are higher, but it could still be a good option if you need to make payroll.

Friends and family

I’m not talking equity here, I’m talking debt. Is there anyone that you can borrow money from, and pay back with either a fixed amount of interest or a fixed return? If you can pay someone 1.2x or 1.5x on their money, they might be happy to loan it to you, and you avoid giving away equity.

Sell your stuff

This may be a last case scenario, but I took a quick look around my house to find things with value that I wasn’t using often enough. I sold my Vespa to a friend, and while I was sad to see it go, that money was more valuable in my business than in my garage.

But remember, I only advocate taking risks that you are comfortable taking. I believed in my new business enough to leverage all of these techniques, but along the way I was reassured by each milestone that we hit, and each new customer that we signed up.

Real businesses are worth more than ideas

If this seems like a lot of work to go through when someone is offering you money now, just remember that a business with a proven model, customers, and ideally some profit is worth more than an idea.

I had many offers from accredited investors, but I chose to be my own investor, at least for now. And as our monthly recurring revenue has increased, so too has our valuation. So, if and when we do decide to take on outside funding, I’ll report back.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.
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