December 20, 2010, 5:00 am

How It’s Sometimes Better To Start With Your Own Money Then Go After Investors Later

by: The Financial Blogger    Category: Business
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Many of today’s most successful companies were started in a garage (or a dorm room, or basement lair, etc), including such household names as Microsoft and Facebook. It’s no secret as to why these businesses have been so successful in the years following their establishment – it’s because they didn’t wait for anyone or anything to get started. With nothing more than a vision in mind and skill on the keyboard, the founders of such companies got right to work building their empires.

Self-started (or bootstrapped) businesses have another advantage beyond merely getting to market fast – they can easily win over the wallets of investors later on down the line. These businesses have qualities that make investors’ mouths water, giving their founders easy access to the funds they need. Today we explore this strategy and learn how it’s sometimes better to go it alone st first.

It Shows Ambition

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Anyone can come up with a great idea on paper, but it’s what you do after the planning stage that speaks volumes about your character. Many entrepreneurs choose to delay getting started on their business because they lack the funds to build a perfect company right off the bat. These are the ones who spend months on end polishing their business plans far past the point of perfection, sending them to every investor in California and New York City, and complaining about how they can’t make progress because they lack a corner office and a bottomless expense account.

Then there some entrepreneurs who are so inspired by the potential of their business that they waste little time diving in head first, no matter how imperfect their financial situation might be. They make do with what little resources they have – setting up a computer and a table in their garage as an office, and getting right down to business creating the core of their new product. These are the few who show a ruthless ambition for their company with or without a funding, the ones who will put in consecutive 12 hour days without complaint, and the ones that investors want to work with.

It Shows Dedication

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While toughing it out on a shoe string budget shows a go-getter attitude, it is certainly not without problems. Concerns over money, time restrictions due to day jobs, and obligations to family and loved ones are bound to impede progress in the early days of bootstrapping. Venture Capitalist Paul Graham calls this new environment an emotional roller coaster, commenting that “In a start-up, things seem great one moment and hopeless the next. And by next, I mean a couple of hours later.”

If you want an excuse to give up, you won’t have to look very far, but if you push through and survive your first year, you have demonstrated a level resilience and dedication that many people cannot fathom. This shows an investor that you aren’t the type to turn and run in the face of problems or terrifying opposition, and that you have a thick enough skin to fight through the hard times and get to the good ones.

It Allows You To Build a Cash Flow

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One of the most impressive qualities a start-up can show an investor is cash flow. Cash flow validates your business model by giving it a self-evident foundation to stand upon. By committing yourself to going without investment for a while, you can get right to work on building a modest revenue. It doesn’t need to rival Google’s net worth, or even knock your competitors from their pedestals, but its something to work with and reinvest into the expansion of your business.

With cash flow comes leverage – no longer must you lament about how “if you only had that investment, things would be different.” Interestingly enough, when you don’t desperately need an investment, they are easier to obtain. Rather than being forced to take a bad deal and give up a controlling interest in your business, you have the time and ability to shop around for the best possible deal.

It Builds a Working Version

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A good idea on paper is compelling, but nothing can compare to seeing the real thing in action. Having a working version of your product or service allows an investor to see its progress instead of taking your word that its “going to be great when it’s all done.” With a working version, investors can track the progression of your product, gauge real market perceptions, and envision a plan for the future.

Much like cash flow gives you leverage to shop for the best possible investment contract, so too does a working prototype. By weathering the first year on your own without investment, you are more or less forced to develop something your users like to use. With a customer base in place and a product in circulation, you’re a “somebody,” and should never be forced out of necessity to jump at the first offer that comes across your desk.

You’ll Make Your Mistakes For Free

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Mistakes can be costly for an investor, especially for a company struggling to find its place in the market. Fortunately, a big advantage of starting out in the garage for a year is that the inevitable mistakes you will make only hurt you and your partners, not the new investor. It’s better to lose a big client in your first few months when it’s only unfortunate for you, than to do so under the careful watch of a brand new investor who just injected $40 million into your business. Investors understand that most businesses fail within the first year, so if you’ve survived past that mark, they know you’ve encountered many big mistakes and successfully recovered without wasting a dime of their money.

About the Author: Sheena Freestone is a freelance writer for FundingUniverse. Funding Universe matches qualified entrepreneurs to banks, investors and other funding sources. Funding Universe helps small businesses avoid scams and rip offs by securing funding from trusted national banks and financial institutions.

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Comments

This advice advice deserves some discussion! There are very few businesses that you can create “in your garage”. You’re talking about service businesses or online businesses, which are of course very easy to start and don’t have much need for capital anyway. Or maybe inexpensive products that don’t need any development like a new t-shirt, i-pod sleeve or small muffin-baking operation.

If you wanted to start a big business, like for example if you had a new drug idea (a venture I was involved in), or wanted to build a bio-fuel plant (another venture I was involved in) or had a disruptive fibre-optic technology (an third venture that I am still involved in) then you need resources. There is no way to do these things without funding from either investors or early customers.

Or what if your business involves purchasing real-estate (another venture I am involved it)? You can’t do that without investment. Even if you have the personal money, you need debt anyway to make it profitable.

I think Goal Hunter is right saying some businesses need more investments than others. Still, there are ways to find one that suits you and that you can start on your own. You can for example start a blog on real-estate investment without really purchasing any at the beginning but just because you are well-informed in that matter.

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What are the odds that an American blog would use stock photos of Canadian currency to illustrate an article? Zero. What was your reasoning versus showing Canadian money?

by: The Financial Blogger | December 20th, 2010 (5:12 pm)

Hey Ty,

My readership is actually 50% Canadian and 50% US, so I can’t win in this situation 😉

The pictures were provided with the guest post. In the end, money is money, I don’t really see the difference.

by: The Financial Blogger | December 20th, 2010 (5:27 pm)

@Goal Hunter,

I get your point, but you can also build huge businesses (the guy from Mint started in his garage 😉 ). But if you want to develop a product, you don’t have the choice of using financing or investors money. However, the more you put yourself, the best return you will get out of your investment.

I’m starting with my own money because it gives me time to really work out any kinks I have in my plan. If I still need investors, I’ll go for it. For now, I don’t want to wait, and if I make mistakes, I rather it be with my own money.

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