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Nick Francis

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12 Benefits of Being Under-funded

Posted: 01/22/2013 3:53 pm

In startup land there's always going to be a lot of noise about fundraising. I get it. It's really interesting and lots of great companies raise money. But I believe there are a ton of benefits to being under-funded, or not funded at all, early in the business. They don't have a lot of sex appeal, but neither does running an early-stage startup (surprise!).

My company Help Scout has about $800k in angel funding, not much by modern standards. We're not seeking a Series A and have been forced to think about the business differently from day one as a result.

I'm convinced it's made us a better company than we ever could have been with $2m, $6m or whatever in the bank. Here are the best 12 reasons I could come up with as to why:

1. It provokes a strong sense of urgency

Forget finding an office space with a sweet kitchen. You've got to focus on acquiring customers and reducing your monthly cash burn. In most every case, this puts your focus squarely on the right things.

2. You can't afford to hire a janitor

Plain and simple, you can't afford a bookkeeper, so you learn how to do the books yourself. It's pretty amazing how hard it is to write a check when you know every dime that's coming out. Same goes for hiring the first sales person, support person, system administrator, PR person ... the list goes on. You are all of those people at first, which can be such an awesome learning experience.

3. You have to charge customers from day one

Users and paying users are practically different species. When people pay you, it's something special to them. Charging users from day one because you need the money makes it real. Are they willing to pay? If not, what would they pay for?

4. Angel investors are patient

Angels are spending their own money and have no LP's. They don't have to return the fund with a certain multiple by a certain date. The economics and motivations are entirely different from that of venture capital. I find myself much more aligned with Angels in this relationship. They are more patient capital, they can wait for the business to mature.

5. There's no time to A/B test

People will disagree with me, but A/B testing is a complete waste of time early in the business. Do you know the volume required for a headline or button color to actually matter? Test something, learn everything you can, then rinse and repeat. You don't have the time to wait for A/B test results.

6. You don't hire until you have to

Companies with a seven-figure fundraise have to start hiring the next day. All sorts of things can go wrong there. Not hiring people until you have a lot of pain in that area insures that you find the right role and you aren't paying until you need it. Most importantly you'll know when someone is great, because they'll do a lot better job than you did.

7. You build things that matter

For the last two years, we've only had the bandwidth to build one feature at a time. So we're not wasting time on guesses, we have to build what customers ask for the most. It's hard to go wrong when people that care about your product tell you how to make it better.

8. You can't afford to go to conferences

Before ever attending a conference, calculate the amount of money your company will burn while you are gone. Listen to the podcast and get back to work.

9. Every customer is gold

I've been nearly brought to tears after losing a customer. When you are scratching and clawing to increase revenues and grow the business, you'll do completely irrational things to earn or keep a customer. And that's the way it should be.

10. Every dollar has to earn an ROI

Under-funded companies will look at their monthly profit & loss to identify what dollars are going out and not coming back with any friends. Those expenses will be cut. Well-funded companies are supposed to spend money on their way to the next funding round, so failed experiments often go on too long.

11. The business does the talking

I think a lot of entrepreneurs decide how to fund the business on day one based on their personal taste and threshold for risk, rather than letting the business speak for itself. Raise a minimum amount of money and bust it for two years, then let the business tell you how big it is, how much funding it needs and what milestones are possible. Approaching an early stage business like this is a much bigger win for investors too.

12. Crawl before you ball

I heard Mark Cuban say this on Shark Tank (love that show!) recently and it's absolutely true. The dirty secret about a lot of fast-growing companies is that they are forced to make compromises. They sell to people that aren't a great fit or spend too much paying for customers. Learning how to grow a business with the right customers and without taking shortcuts will pay dividends down the line.

Being under-funded can be lonely. You won't find TechCrunch knocking on your door or anyone patting you on the back for the last raise. But like most things in life, building a company is about delaying gratification. Do the things that are hard now, win later. Chances are you'll enjoy the journey more when you do it this way.

 

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