By Mark Calabro, co-founder HungryHungry
Startups have often been associated with venture capitalists and private equity but there’s a case for funding your business yourself. When Shannon Hautot and I started our first business, OrderMate, together we were still at university and we never entertained the idea of raising capital to fund the business.
The technology and software development behind OrderMate was completely new and we knew it would take took us a few years to perfect it. We were primarily focused on providing a solution to a problem before we were interested in running a business, and this is not something afforded to you if you have committed to providing investors with a return on their investment pressuring you to turn a profit as soon as possible.
Bootstrapping our first business also showed us the value in testing and failing, learning and improving and we did it at our own pace, on our own coin, and with accountability only to ourselves. Making mistakes is an important part of the growth of a new business, and investors can have a lower tolerance of that process.
Building a business takes time, investors are impatient
Every new startup needs the initial breathing space where the founder(s) can bring all their ideas to the table and hash out what their vision is and how they intend to bring their dream to life. Shortcutting this process by bringing in third-party investors too early can make a startup rush an incomplete product to market to meet external revenue pressures before the product’s potential has been explored thoroughly. I believe outside investment can be more of a risk than a benefit at this elementary phase of a new business.
Seek wisdom outside of the investment relationship
One counter argument we often hear is that experienced investors can offer a lot of wisdom in the startup phase. However, instead of taking on investors who have an expectation of financial return, an alternative recommendation is to seek out mentors who don’t have these boundaries who can serve as part of an advisory team. They may also have the potential come on board as investors when you are ready. This way you can choose advisors who can help you in different areas, from shaping your product to understanding your market better, providing connections to providing a sounding board, well before you focus on generating profit or providing a return on investment.
Work for yourself before working for investors
The earlier you take on investors, the greater the chance you will end up feeling that you are working for them rather than building a business for yourself, particularly if the investors require a seat on the Board. The investors don’t want to run your company, they want you to run the company, taking into account what direction they want the business to go in. If you end up owning a minority share of the company you started it can be difficult to retain that same motivation that comes from whole ownership, or, you might be better off taking a role as an employee somewhere else where you don’t have the added stress of reporting to a Board of Investors.
Don’t let investment money curb your creativity
When you have investment money at your disposal, you start to view it as part of the solution to any problem because it’s often faster to pay for a fix. This reduces creative thinking and burns your cash too early. When you’re on your own coin, you tend to look hard for alternatives before throwing money at a problem and that can often be a great learning curve. Sometimes a problem ends up being a feature, not a bug.
It was for all these reasons that when Shannon and I were looking to launch our second business, HungryHungry, together we decided to personally invest our own money into it for the initial stages and to date that figure is well over $2million and fast approaching $3million. We are certainly not anti-investment; we considered our options, including venture capital or taking on a private equity partner, as we understood that it could facilitate a much faster scale-up process if done right. For this latest venture, however, we benefited from having spent nearly two years testing and refining the business and the technology behind it. Only now are we certain that outside investment can add value to our second startup, and vice-versa, real value to the investors.
So, my advice is really about making sure you get the timing right if you plan to seek investment and in our experience it’s rarely ideal for young startups; investment is actually better suited to businesses maturing from startup to scale-up.
Optimally, you should have the concept fully fleshed out and, if it’s software, you should have the basic code worked out. Having a number of established customers will also work in your favour – less because of the cash flow and more for market validation of the idea and initial execution. All this is better developed as a self-funded startup. Ask yourself: without market validation, is it really worth pursuing investment?
Mark Calabro is the cofounder of hospitality tech startup HungryHungry and point-of-sale technology company OrderMate. His ability to combine his love of food with his skills in technology, marketing and sales, has made him the perfect ally for the hospitality industry, where increasing overheads and competition continues to shrink profit margins.