Do Startups Need Funding Anymore?

Startups without financing are like small boats in a big ocean. 

The short answer is “No. Startups these days can usually get going without investors.” The longer, more nuanced answer is “But if you can get funding, it is probably a good idea.” Now, more than ever, startups can start-up without investor funding, but taking on investors may be the difference that makes the difference. There is more to building a startup (and surviving) than simply starting up. In my early startups, I always very strongly preferred to run without any external financing – and it worked, for the most part. Even when server RAM was $1,000 per GB and cloud computing was still a decade or more in the future, it was possible to start a successful software-based tech business and exit without taking on formal investors. Fast-forward to today, and the technical side of the startup process is cheaper and easier than ever. Between open source software and cloud-based services, a web startup these days does not face many huge hard costs in the beginning. And most importantly, when you don’t take on investors you get to keep control and all of the upside if you are successful. Even so, there is a very strong case to be made for formal funding.

Why to Seek External Financing

Marketing budget: Once you have built your product, what are you going to do with it? Connecting your product with a large audience takes money and careful planning. Having a marketing budget behind you makes this more likely to work.

Speed to market: How much time do you have to hit your window of opportunity? How much more likely are you to hit that window if you have the capital to attract and hire great talent to build your idea with you?

Visibility: A startup with a big name backer gets the visibility and reputational benefits that a self-funded group can only get by actually becoming successful. This can have significant upsides including access to talent, access to advisors, access to more money, and access to free PR. Funding in itself can make you “somebody,” even before you even ship your core product.

Smart money: The best investors will join as partners, not simply check writers. Having motivated, smart, and connected partners on your team comes with obvious benefits beyond the bank account. Active VC investors will likely be guides that help you to make your critical business decisions. They may not always be right, but they will be interested in guiding you to the best possible return on their money.

Less Personal Risk: When you have investors contributing significant funding, it frees you from the risk of draining your bank account while trying to get off the ground. Self-financed companies know no bounds in terms of how much money they may demand–which can take a heavy toll on founders. Imagine running a business 18 hours a day AND not knowing where your next rent payment is going to come from. Better to separate your personal finances, and company finances as soon as you can. Also, having a great relationship with good investors can give you a soft landing – they might have other projects for you to roll into if your startup doesn’t succeed.

Water Displacement: This might be the most important difference between self-financing, and formal financing. In shipbuilding terms, “Water Displacement” is how you categorize the difference between small boats and big ones. Small boats will float and can carry you toward a destination, but can be swamped when waves come or the weather turns even a little bit bad. Imagine a canoe on the open ocean. It works, but common sense tells us its not such a good idea. Larger boats, (those with a great deal of water displacement), are inherently more stable. Waves and weather rarely swamp or sink large vessels. Startups can be the same way. I have been a partner in a couple of different un-financed startups where events ended up causing a major pivot in one case, and a complete cessation of operations in the second. In both cases, more money in the bank would have solved the problem. The solution in both cases did not even require the spending of much money–just having it in the bank would have been sufficient. Money in the bank is just like the displacement of a vessel–it gives you stability and the ability to survive a wide variety of unexpected startup events that would likely sink a self-financed startup.

So Which Approach is Best?

Even when you intend to get financing, a “blended approach” between self-funding and formal funding makes a lot of sense in many cases. The fact of the matter is that a blended approach is most often the only option. The objective is to hit the ground running and get started with your own cash on hand with the goal to get as far down the track as possible as quick as possible within the constraints of your financial situation. In doing so you will learn more about your funding requirements, you will learn more about your market (which makes funding easier to get), and you will position yourself to keep more of your equity should you actually take on investment. Real progress in product development and market penetration mitigates risk for investors, and increases the valuation of your startup–both good things that will get you more dollars for less of a percentage.

And if you do decide to pursue funding, remember that all investors are not created equal. Make it a point to diligently research the reputation of your potential investors before signing anything…but that’s another article.