Ep 3: How to fund your business or startup. We explore some different funding options avaliable.
Helen Vang (00:00):
This is the Startup Reality Podcast, bringing you honestconversations with founders, business owners, and industry professionals aimedat sharing what it means to find your voice, grow your business, and achievesuccess the way you define it. Whether that's growing your career or starting abusiness, The Startup Reality Podcast shares insights for the journey ahead,the challenges awaiting and the strategies used to overcome them. So in lastweek's episode, we spoke about business plans and what you need to considerbefore you dive into the world of business or startup. This week, ourconversation is all about funding. So now you have your business plan andyou've made the conscious decision to start your business or launch a startup.You need to consider different funding options. We're going to do an overviewin this episode and then we'll go into more detail in the follow up episodes.But before we get started, in the spirit of reconciliation, the Startup RealityPodcast would like to acknowledge the traditional custodians of countrythroughout Australia and their connections to land, sea, and community. We payour respects to their elders past and present and extend that respect to allAboriginal and Torres Strait Islander people here today. When you think aboutfunding, what's the first thing that comes into mind?
Helen Vang (01:28):
Personal savings, drawing on your mortgage, raisingcapital maybe? There's lots of different ways to fund your initiative in asmall business environment. The general funding option is through drawing onyour personal savings or drawing on the equity within your home. But the mostcommon funding thought for startups is raising capital. We're gonna hear fromWilliam Page, um, and hear how funding through raising capital might be a greatidea, but also how not raising too much funds can also be a great idea.
William Page (02:11):
So it's commonplace in the startup space for people tothink that you need to raise capital in order to start your startup. You know,the more money you raise, the quicker you'll be outgoing to market, the betteryour product will be, the more easy you'll be able to scale. But I thinkthere's a number of issues with that. Fundamentally throwing more money at aproduct that you need to develop doesn't necessarily mean that you will be moresuccessful in developing that product. Actually, if you have less resources,then your focus is more precise. You trim out or trim down and really focus onwhat's important. You focus on acting in a more agile manner and reallyutilizing what limited resources you have on improving your core product. Andat the same time, it also stops you from spreading yourself a little bit toothin and trying to take on more than you really can.
William Page (03:10):
So in that sense, having less resources, at least at thestart, can be a very effective way to ensure that you focus on priorities thatyou act in an agile manner, that you don't get distracted, and that you try toget a form of your product, even if isn't MVP ready, such that you can go tomarket and prove that you got, you know, product market fit. Because obviouslythe sooner you do that, the sooner you get cash flows, the sooner you havefurther resources to the business. A great example of this is actually whatSteve Jobs did when he first came back to Apple in, 1997, I think it was. Whenhe first came in, after the next acquisition, he immediately said about,basically cutting off a lot of the product lines that Apple had developed.
William Page (04:02):
Apple had spread itself too thin, yeah, developed way toomany products that was trying to satisfy all the different needs that it hadfrom retailers. And this led the company to having lots of different versionsand just becoming a really complicated beast. So what he did is he reduced thenumber of Apple products, and I think he focused on, I think it was about fourproducts, and really focused what limited resources they had on those productsto do them as as good as possible and because of that approach, he then managedto turn the company's fortunes around. He really focused on those few productlines, made them the best products that he could, and then obviously thenrebuilt the company off the basis of of that focus.
Helen Vang (04:47):
So before we continue the conversation, the key takeawayhere that I just wanted to highlight is that the reason why less can sometimesbe best is because it forces you to focus and prioritize your efforts becauseyou don't have unlimited resources. So while we recognize that sometimes lesscan be best, especially when you are starting out, because it forces you tofocus and remain creative and innovative in your solutions, we are now going totalk about funding your business because the reality is that you are going toneed some sort of funding.
William Page (05:31):
So look, every business needs some capital. You can'tstart a business with zero funds. So, you know, depending on the nature of yourbusiness, you will need to raise some money. Now, obviously if you've got atech-heavy startup trying to develop the best new product in the market, you'reprobably gonna need to raise more capital than if you're doing a business whichcan generate cash flow at an earlier stage. So a lot depends on the business,the nature of your business or the industry you're in, in what you need to dowith the finance that you, you're gonna need. Now, the best way by far in awayis to bootstrap your business by far in away. So that's where you essentiallyuse your limited savings that you have or you raise a very small amount ofmoney from friends and family to essentially bootstrap your business, get yourproduct, your core product, your initial product developed, get it into themarket, start to generate cash flow.
William Page (06:22):
Then when you generate cash flows, you then can use thatto fund the growth of your business. A great example of a successfulbootstrapping business is actually Atlassian, the Australian unicorn. Theybuilt that off the back of 10,000. Well, the story goes that they did it offthe back of 10,000, 10,000 pound or $10,000 credit card. Maybe, it was more,but that's what they say. And they basically got their initial product outtathe market. They got customers, they got sales, and the rest, as they say ishistory. They didn't raise their first round of funding until nearly a decadelater. No, it wasn't a decade, but eight years later. So, you know, that's agreat example of bootstrapping. It's easier to just figure out what money youneed, the bare minimum, bare nuts and bolts and do that.
Helen Vang (07:13):
Now, before we get excited about bootstrapping, there isprobably something that we should note. Bootstrapping a company like Atlassiandid, works effectively when you are a developer, if you're building a techstartup because you already have the skills and you don't actually have to fundthose skills. Just wanna call that out because that's also a reality and somethings you need to consider if you are looking at bootstrapping your business.
William Page (07:44):
Yes. So in Atlassian's case, they were, they were able tobuild their initial product because they could do it all themselves. So a lotdepends on your skillset and your team. So if everyone in your team brings acertain skillset, so if one person's a developer, one person's a businessperson, one person's maybe a lawyer or an accountant, one person is asalesperson, for example, but you've got four very different skill sets. Or youcould have, you know, a couple of founders who can do two or more of those skillsets, in which case the costs are a lot less. So it really does depend on whatthe skillsets of the founders are. Another approach that you can use is toactually barter. So you barter your skills for someone else's skills. So sayfor example in my case it would be strategy in law.
William Page (08:33):
So I would barter those skills. I can help someone elsewith those areas and then they'll barter, I don't know, maybe their technology,maybe their coders. So they'll do some work for me. I'll do some work for them,won't cost either of us any money. The only thing that costs us is time, but itallows us to get a valuable resource at no cost or except for time, but it alsomeans that we focus on what we are good at. So, which means by default weshould do it faster and we should be able to do it more easily. And I hasten tosay, except it's not necessarily the case with law, but we'll enjoy it slightlymore.
Helen Vang (09:06):
Now, this is a really great point in particular becausethe misconception is when you become a business owner is that you can outsourceanything that you don't like, right? So I don't like accounting, so I'll payfor a bookkeeper or an accountant to do all that work. Now, that is a great wayto run a business if you have lots of cash and a capital to support thatoutsourcing of the components that you don't enjoy in your business. However,if you don't have the cash, then you need to trade time instead of trade money.And that's why the bartering process tends to work really well.
William Page (09:54):
Another approach that you can use, which is becomingextremely popular is crowdfunding. And I think there's a lot to be said forcrowdfunding, depending on the nature of your product, it is a great way toraise awareness of your product, to build a community around your product, toget people excited, to get public relations (PR), to really integrate gettingthat bit of capital from the crowdfunding raise with your product launch. Andin that sense, it kills two birds with one stone. It's a very, very effectiveway to both raise capital and to do marketing and get your product to market toget people excited. Now, the key thing to be aware of is with most Crowdfunding, you need to, especially if you're going down the equity path, you needto have around 30 to 40% in the back of your pocket in soft commitments thatyou know you can draw upon because you need to create an impression to thecrowd, to the market that you are in demand that people are pouring in.
William Page (10:55):
So if you don't get that initial burst of say 30% to 40%,then people start to think that your campaign has flaws in it. It's got issues,unfortunately the crowd are like lemons. So you need to develop, you need todevelop that momentum and show that there's a lot of lemons already there. Andconsequently, as long as you're aware of that, you need that failure of 40% inyour back pocket. And also just to stress this, doing a crowd funding round isa ton of work. So it's not something to be taken lightly, it is significantlytime consuming. It has to be done properly. You've gotta get all the pitchdocuments, you've gotta get a video, you've gotta get all the materials right,but in theory, you can kill two birds in one stone and it can also get yourproduct into market and show that there is a demand and an interest for theproduct that you're selling or the problem that you are trying to solve.
Helen Vang (11:49):
And for those who dont what crowdfunding is?
William Page (11:52):
And for those who don't know what crowdfunding is, it canbe, sorry, I should have explained this. It can be split into equity andnon-equity. So equity is where you do a crowdfunding raise and in return yougive away a certain percentage of your company. That's equity. The biggest twocrowdfunding platforms, if I remember correctly, is Cedars and Crowd Cheap, atleast in Europe and the US they are. Then you've got non-equity, which is likeKickstarter in Indiegogo, and they are where they don't get a share of yourcompany, but they maybe get perks. So they get product, maybe they get sign,maybe they get other perks, they get experiences. So it really depends onwhether you wanna go down the equity or the non-equity route. And also bear inmind that a lot of crowdfunding campaigns don't work or don't succeed. And ofcourse, if it doesn't succeed, it can have negative connotations for yourcompany in terms of reputation.
Helen Vang (12:42):
Now, let's just say you've done your bootstrapping, butyou need more cash, however you've decided against crowdfunding. Another thingthat you might have heard about is incubators and accelerators.
William Page (12:56):
Yeah, so another approaches from incubators andaccelerators. So these are popping up all over the place. They're increasinglyfocusing on specific industries or specific sectors. Many of them are back bycorporates. Many of them throw resources at UBI Financial and non-financial.These programs generally can be pretty good, but the issue is they're very timeconsuming to apply for. So that's time that you could be spent doing otherthings. Some of them are not particularly good to be honest with you. Some ofthem are pretty poorly run and can do more damage than anything. Butfundamentally a lot of them also do provide cash, but they provide that cashout fixed equity, right? So maybe they'll give you 50,000 bucks for a 7% shareof your business. So then that fixes your valuation to that rate, and thatmight not be right for your business.
William Page (13:44):
So think very carefully around whether you want to applyfor an accelerator or an incubator and ask yourself a number of questionsaround what those tose accelerators will could do for you. And we will bepublishing an article on this, which will highlight a number of these keyquestions that you need to ask yourself. We've identified 10 different areasand this will be published shortly, but happy to answer any questions on that.Another approach you can use is to win contests. So you can apply for conteststo win funding. There's not so many of these. These are great from a publicitypoint of view, but similar to, um, to, to accelerators and incubators. Theytake time to apply for and time to pitch for. So you need to make sure that youdon't lose focus when you're applying for these fins.
William Page (14:36):
Another thing you can do is use bank loans, um, or creditcards. But this is easier said than done. It's not necessarily easy to get,especially with new stage businesses. Banks are very risk averse, so we don'tsee that too much. There's increasingly government programs and they shoulddefinitely be a focus. There's a lot of government schemes out there, whetherin the UK or Australia, which offer incentives to startups to encourage them,or they provide R and D tax credits. So research and development tax creditsand lots of, lots of different schemes that can be tapped into. These aregenerally pretty good. They can provide anything from a few thousand to ahundred thousand dollars and they should definitely be tapped into if you can.Just, again, be aware that they're time consuming to apply for. So just makesure you don't lose focus.
Helen Vang (15:27):
So here we've spoken about a number of ways that you canraise capital to launch your business initiative and fund your idea. However,we do wanna talk about the most widely publicized funding approach, which israising capital through venture capital funds. Now, the media does a lot ofcoverage in this. So generally when people think about raising capital, they dothink about, well, "how do I pitch to investors and raise through avc?" And I think that's important that we talk about that, especially thereality around what it's like to raise capital in that environment.
William Page (16:12):
So you're absolutely right, the media portrays, you know,start a startup, raise millions in capital, build your product, go to market,scale, made lots of money, sell your business, go sit on a beach. The realityis raising capital is extraordinarily time consuming. It takes a long time tostructure, long time to get ready. Then when you start pitching to investors,that in itself is a huge art. You need to be good at pitching. Then when you dopitch to investors, what one investor loves and wants to see another investorhates and thinks is irrelevant. I think the figure is only around 1% or justunder 1% of startups are invested by angel investors and significantly lessthan that are invested by venture capital funds. And you know, this is why Ialways tell them, tell founders certainly forget about venture capital fundsand don't waste the time talking to angel investors unless you really need to.
William Page (17:15):
It's far better that you focus on growing your business.It's far better that you focus on getting product market fit and on scaling.Because fundamentally, if you can prove product market fit then you reduce theexecution risk and that's much more likely to also make you quite an attractiveproposition to investors. So by focusing on the product, by focusing on theproblem that you're solving, by focusing on the needs of the customer going tomarket and getting some early stage revenues and cash flows, you'll then be ina better position. Well, you'll literally be in a better position to surviveoff of that cash flow anyway. But in the event that you do then want to go tothe market, you are also gonna be in a better position because the investmentswill say, "oh, right, well how much monthly recurring revenue yougo", "oh, you got a hundred thousand per month", "Oh,that's pretty good"
William Page (18:01):
Then that's gonna make you more attractive to them than ifyou're just an idea on a piece of paper. So that's why, you know, you shouldforget about raising capital in the early days. I mean, you know, I've raisedcapital when it's one of the biggest things I regret because it takes time.It's a very time consuming process that takes your eye off of the product. Andthen once you get those investors, you then have to manage them, you know,which then involves making sure they're happy, making sure everything's okay,and then that becomes a time consuming process. So it's far more effective thatyou focus on cash flow and bootstrap for as long as you can.
Helen Vang (18:39):
Now this is a conversation that I love having withWilliam. So I asked him when did he start looking at raising capital?
William Page (18:48):
Yeah, good question. It was a few months and we raised,geez, I can't remember now, a hundred thousand dollars I think, $150,000. Andthen we raised quite a bit more over a period of time. But we were quite goodat tapping into government finance. But even that is time consuming. Then youhave all auditing and you know, those kind of things which are just, you know,red tape. They're just bureaucratic nightmares. So, you know, do I regret it?Yeah, I probably do. I probably would rather have not wasted my time with that.But the reality is this is what everyone says you need to do as a startupfounder and I wasn't to know any better at that stage. So yeah, I did it. WouldI do it again? Probably not, but you know, you learn, right? So only raisecapital if you absolutely have to. And if you do, you know, if you have nochoice or if you're at the growth stage, if you're at the growth stage andyou're getting great cash flows and you've got product market fit, then sure,go raise capital because you'll be telling investors what you want and they'llbe wanting to give it to you because you're in demand.
Helen Vang (20:04):
And that's everything that we have for this week'sepisode, covering different funding options. Tune in next week to go throughbootstrapping in a little bit more detail, some benefits, how to really make itwork for your business. We'll see you then.