09 Funding Strategies to Go the Distance
The best time to raise capital and more…
The topic of funding is one that everyone wants to know about but is openly discussed by few. Ironically, the more it is talked about, the more educated entrepreneurs will be, enabling them to make the right decisions as they seek funding for their startup.
The following video workshop (1 hour and 56 minutes) reviews the different considerations entrepreneurs need to make when evaluating funding strategies. You will also find Startup Secrets related to:
- The best time to raise capital
- What investors really look for in a startup before they provide capital
- Valuation…and the ability to truly evaluate
- The most important capital you will raise
There are a lot of factors to consider when deciding on funding strategies for your startup, from determining the funding partner, the investment amount, timing, and terms, to name a few. With the funding landscape changing every day, this resource is designed to educate and foster a broader conversation on the topic.
Video Workshop: Fundraising Strategies to Go the Distance
On the go? Listen to this workshop on SoundCloud:
This workshop contains frameworks from all over Startup Secrets. Jump to specific ideas in this video:
- Start your business without external funding by Bootstrapping (5:24)
- Understand what comes with a Term Sheet (1:02:51)
- Know what investors are looking for in your Financial Details (1:15:30)
- Impress your investors with realism and optimism by being a Realistic Optimist (1:15:50)
- How much is your startup worth? Getting to the details on your Valuation (1:21:15)
- The most important capital isn’t Venture money, it’s your Human Capital (1:26:30)
Case Study: RightNow
In our workshop on Funding Strategies To Go The Distance, we ask several questions for you to consider as you weigh the merits of various funding strategies. Today, we’re diving deeper into one option in particular: bootstrapping, with a great case study from RightNow technologies.
Founded by Greg Gianforte in 1997, RightNow Technologies is a software company that was acquired by Oracle for $1.5 billion in 2012. Though he eventually raised venture capital financing, Greg began with as little as $5,000 of his own money and continued to rely on personal savings, friends, and family for the next two years.
His decision to bootstrap came as no surprise to me: I have known Greg as a great entrepreneur for many years. As such, it gave me great pleasure to introduce him to a class of Northeastern University students. Ian McLarney, a student in that class, combines the highlights of that discussion with his independent research below.
As you read, ask yourself: Is the impact of bootstrapping limited to the share of equity retained by founders? What other impact is Greg’s approach to funding having?
~ Michael Skok
Contributed by Ian McLarney
In 1997, Greg Gianforte founded RightNow Technologies with $5,000 of his own money. As opposed to raising external sources of financing, Greg continued to fund the growth of his business with family and friends’ money for the next two years until, finally, external financing was necessary. Contrary to popular opinion, Greg’s decision to bootstrap is actually representative of the strategy employed by the overwhelming majority of startups, and it was directly responsible for his company’s long-term growth.
In March 2016, the Kauffman Foundation presented its latest research on the most common sources of startup financing at SXSW in Austin, TX. Its ten-year study revealed that only 5.8% and 4.4% of startups received angel and venture capital, respectively. By comparison, 34.9%, 30.0%, and 6.3% financed their growth using bank loans, personal savings, and money from family and friends respectively. (1)
Notably, this distribution remains true for even the world’s 500 fastest-growing companies. (2) More specifically, only 7.7% and 6.5% of high-growth companies received angel and venture capital. By comparison, 51.8%, 67.2%, and 20.9% financed their growth using bank loans, personal savings, and money from family and friends respectively. (1)
In a conversation with Northeastern University students, Greg Gianforte elaborated on this topic. Greg not only acknowledged the prevalence of bootstrapping among startups; he also referred to it as the foundation of a lower-risk, cost-conscious, and customer-focused company culture.
“When you have money,” Greg began, “you’re going to spend it, and you lose spending discipline. Whether it comes from customers, venture capitalists, or a bank, any money you raise comes with strings, and the only strings that pull you forward are those attached to your customers.”
Greg called more than four hundred potential customers before officially launching RightNow Technologies. (3) Though each conversation was nuanced, he consistently asked about their pain points, and he learned how he could tailor his proposed solution to meet their needs.
Throughout his fifteen-year tenure at the helm of RightNow (Oracle acquired RightNow for $1.5 billion in 2012, including stock options), Greg championed this same customer-first approach to business, in part, through his decision to delay external financing.
“When you raise money,” Greg told the Northeastern University students, “you get a new set of masters. We were really, really focused.”
Despite his comments, Greg raised $16.4 million from Greylock Partners and Summit Partners in 1999. Admittedly, Greg said there comes a time in the life of almost every successful startup when external financing is indeed necessary. In his case, Greg said that venture capital was needed to fund his company’s expansion into Europe and the subsequent increase in his sales force.
Nevertheless, Greg reiterated time and time again that the impact of bootstrapping on his company’s culture was never lost. In fact, it had firmly instilled the respect for spending discipline that, arguably, enabled his company to survive the ensuing Internet Bubble even as his competitors folded.
As one investor pointed out, RightNow Technologies was a “good house in a bad neighborhood.”
In conclusion, bootstrapping is as much a financing strategy as it is a cultural ploy (click to tweet). Whereas the preservation of equity ownership is obvious, the tendency to increase frugality, accountability, and customer-alignment in the long-term — even as a company’s financing strategy evolves — is less so. As Greg himself said, “Culturally, bootstrapping is just the right way to go.”
Greg shared specific reasons for raising external financing. What else should you consider before raising external financing of your own?
Greg suggested that culture is an ongoing business priority. Indeed, every decision he made — from how and when he raised money to how he hired new employees — was representative of his cultural preferences. In his conversation with the Northeastern University students, he said that he hired on the basis of three criteria: culture-fit, talent, and experience. Why does that order matter?
(1) Harrison, J.D. “No, Entrepreneurs, Most of You Don’t Need Angel Investors or Venture Capitalists.” Washington Post. The Washington Post, 16 Mar. 2015. Web. 25 Nov. 2015.
(2) “Introducing the Inc. 5000 List of America’s Fastest Growing Companies.” Inc.com. Inc. Magazine, n.d. Web. 06 Dec. 2015.
(3) Sahlman, William A., and Dan Heath. “RightNow Technologies.” (2004): 1-26. Harvard Business School, 18 Nov. 2004. Web. 25 Nov. 2015.
Case Study: Bootstrapping with Givology
Contributed by Alok Tayi, Ph.D. Special thanks to Coulter King and Joyce Meng of Givology for their contributions to this case study.
Givology is a student-run social enterprise that helps individuals find and fund education-related projects around the globe. Givology was launched in 2008 and founded by three University of Pennsylvania undergraduates: Joyce Meng, Jennifer Chen and Carl Mackey.
Unlike other non-profit organizations that focus on one project or geography, Givology publicizes and sponsors “grassroots education projects and student scholarships around the world.” Pursuing such an admirable goal promises to have a big impact; nearly one out of five kids of primary school age in the world are not in school. The cost of education (fees and supplies) coupled with poverty perpetuates this problem.
Givology serves as a fundraising platform and is able to make an impact through the financing of local partners. Givology finds partners that have a good track record, but are financially constrained; with the help of Givology’s fundraising, volunteers, and publicity, local partners are able to make a large impact on local communities. Thus far, they have provided over $628,846 in funding to sponsor 2,875 students and 46 partners. Additionally, Givology-funded projects operate in 26 different countries.
Interestingly, this social enterprise chose to bootstrap as its funding strategy, much like their for-profit counterparts. With a virtual office and a 100 percent volunteer workforce, Givology operates on a budget of only $400 per year – funds required to host their website. Additionally, they recently launched a book called A Guide to Giving. Within this text, they provide advice and best practices for other young social enterprises.
The Givology team has identified ten best practices for founders of a social enterprise – of them, several are directly relevant to fundraising and use of limited capital. For new social enterprises, early donors/investors are a critical source of funding. Since the process of attracting new donors is difficult, Givology found that developing strategies to maintain the enthusiasm of existing donors is key.
With those limited resources, non-profits are urged to launch their product or service quickly and cheaply – an homage to The Lean Startup methodology. The Givology team has found that it is best to match expenses with inflows by “thinking critically about return on expenses.”
Givology represents a new approach to raising funds for social enterprises with techniques new and old: one part crowdfunding, one part microfinance, one part conventional philanthropy. This focused and bootstrapped approach allows them to reinvest nearly all their resources in making a meaningful impact globally.
Case Study: Endeca
Endeca was acquired by Oracle in 2011 for $1.1 billion. In the above presentation, Endeca Founder Steve Papa discusses his funding strategy that helped make the company a success. Steve also shares key lessons learned, such as the significance of macroeconomics and how determining your funding strategies starts long before you are actually pitching to investors.