In 2012, venture capitalists invested $26.5 billion in 3,698 deals according to the National Venture Capital Association. Many entrepreneurs I’ve met feel that the ultimate validation of their idea is securing outside investment — the capital to scale the business. However, the timing of when a startup accepts outside funding can really be a game changer, and many entrepreneurs spend way too much time thinking about the funding. It’s important to realize there is a right time for raising capital, which is different for every company. It’s also critical that founders do not spend so much time chasing funding that they take their focus off the primary goal — which has to be growing the business.
Accepting funding too early can potentially hurt what would otherwise be a great core business idea. Assuming you can finance it, you can ideally avoid undue dilution by ironing out the business model first, and really finding out what works for your market. Always acting like you are capital constrained is great discipline, and if it comes easy, and you actually are capital constrained, you’ll be forced to build a very sustainable business. If you bootstrap your business, you have the ability to focus on innovation and take risks without having to convince others.
If you can find some way to finance your business early on, then you can focus on scaling the business and making a profit first — which is what actually matters — and on securing capital second. With the low cost web technologies and solutions, and the cloud based infrastructure offerings that are available today, a lot of software based businesses can be bootstrapped — something that was close to impossible a decade ago.
Essentially, businesses that focus on cash flow and expense management have the potential to be much larger successes by avoiding the time, distraction, and dilution embodied in bringing in outside capital.
In my mind, there are four critical areas to focus on to fuel the growth of any business and that can help an entrepreneur try to avoid needing a lot of capital early on:
1. Keep expenses low wherever possible.
- Create a high return recipe for success — by figuring out your mousetrap you can make sure that every dollar you invest will get you a return.
- Don’t spend money if you don’t have to. Rely on cost efficient or free tools, such as Google Analytics and cloud services, to help you measure and fine tune your business without big contracts or investment.
- Always look for lower cost alternatives (there is no such thing as cheap enough).
- Learn your cash cycle early and focus on it; scale changes many things, but it’s pretty rare that it changes the basic economics of a business.
2. Leverage technology.
- Find routine tasks you can automate for immediate savings – these exist throughout your business.
- Measure everything, but remember data is only useful as much as it is used – who is using it? Is it driving your business?
- Building software can be expensive and time consuming. It can also be the key to a business succeeding. Focus on minimally viable product and have a mentality to always be shipping product (releasing new software).
3. Pursue multiple growth paths.
- Once you have momentum it is important to keep it going. Identify growth opportunities and then pick one. Find a low cost way to get started, and go for it!
- Expand when the time is right — whether that’s in new markets, new categories, or new partners
- While expanding keep the first rule in mind (keep expenses low) – don’t let yourself get blindsided by step-changes in your operating expenses
4. Stay customer centric.
- Immerse yourself in customer feedback — routinely ask open ended questions and listen. Then challenge yourself by asking if you really responded or if you gave the feedback lip service
- Actions speak louder than words — show your customers that they matter.
- Ensure that customer-centric orientation is rooted in your culture, across all levels of the organization
These are just a handful of bullets, but anytime you cut the cost of something 10 percent, extend payment terms 15 days, or skip buying something, you get closer to not needing external capital. Growing off internally generated funds may seem impossible – but it is not. It just requires focus and recognition that it can be done.
[Editor’s Note: This is a guest post by Niraj Shah, the co-founder and CEO of online home goods retailer Wayfair.com, which operates Wayfair.com, AllModern.com, and JossAndMain.com. Niraj and his college roommate and co-founder Steve Conine grew the company to $500 million in revenue before taking on the first round of funding nine years into the business.]