When Entrepreneurs set out to start a business, one of the first things they should finalize is the first checkpoint for the business. In today’s world it can mean one of two things:
- Get the first round of funding
- Build a profitable business
Even after you get the first round of funding, you may want to eventually have a profitable business or a successful exit. However there is a big difference between the two strategies.
When you are trying to raise funding, there are a few factors which determine whether you will be successful in decreasing order of importance:
- Previous successes
- Market you’re playing in
- Current state of your product
Connections are of course the most important. If you already have relationships with investors who know and respect you, it will be relatively very easy for you to secure funding.
If you have had previous business success, whether on your own or within another company, it goes a long way in giving people confidence that you have a history of making money for other people and you would avoid obvious mistakes.
After the above points, one of the most important factors is playing in a field which is really hot. There was a Social wave from 2006-2010, a SaaS (Software as a service) wave from 2010-2012, a Shared economy wave from 2012-2015, and it’s looking like there is an AI wave from 2016 onwards. Investors tend to invest in a space that is gathering attention.
Finally, the most important thing is the current state of your product. The ease of funding can be determined by the current state, which for a product in the Social Networking domain might be anywhere from a prototype to a launched product which has more than 100 thousand users. For an enterprise product, it could be anywhere from a prototype to dozens of paying customers.
As you can see, your ability to raise funds for a business depends on quite a few factors. However, at the most basic level, the more predictable your success is, the more likely people will invest in you.
As a first time entrepreneur, if you’re looking to raise money and do not feel rock solid on at least one of the above points, you can expect a long and challenging path to funding, which can be very disheartening.
If you decide to go the other route and build a profitable business first, you will face other challenges. You may end up using your savings or require a loan from friends, family, or a bank. Essentially, you’ll do whatever it takes to get your business to profitability without needing funding from professional investors.
This avenue can leave you you feeling strapped financially or under pressure to return money to loved ones or a bank. All of this gives you a small window to execute and start seeing revenues.
A vast majority of the stress of starting a business comes from this step, as funding can be daunting. However, if you feel confident in the execution of your business, you may have a shot at success. Obviously, it would be wise to filter out lofty ideas like building self-driving cars, which might end up taking years to build. However, it could be worthwhile to choose an idea and scope where you can start seeing results sooner.
In my opinion, working with limited funds has benefits. It keeps you focused on the core product and idea. You’re not wasting time chasing and courting investors (which will be a lot if you do not already have traction, previous successes, or the right connections).
Limited funds adds scarcity and control to the early days of your business. You have to be judicious with where you spend and can’t afford to be distracted by shiny objects. You have to ask yourself — do you need money for building the company? Or for growth? There’s a big difference.
If you tackle business building this way, it’s a good idea to start while you have another job. Save money before you start the company. Be very cautious about spending while in business, because every dollar counts. Saving money will let you go longer without any funding at all. Raise money only if you need to power exponential growth.
Whether your goal is venture funding or making profits on your own, it is always a good idea to start building your business lean and aim for results as soon as possible. The focus of the rest of the book will be on how to create and execute a desirable product.
I would like to emphasize two important factors before getting started on the details of building your business. Many of my friends hate their jobs and have for years. When I look back on my journey as an entrepreneur, whatever be the situation financially or otherwise, I have always enjoyed my work immensely.
So the two important points to always keep in mind on your journey are:
- Have fun
- Learn on the job