Years ago as a startup founder, I found myself in a difficult situation. For the fourth time in six months, my educational startup Zulama was struggling to make payroll. Each time we had been saved when a hard-won, last-minute customer payment had arrived, or an investor had finally written their check. Each time I had vowed it would be the last. Obviously something had to change. I needed, but didn’t have, a Plan B.
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Don’t Put All Your Eggs in One Basket
Even though we had paying customers, we wanted to maintain our first-to-market advantage and decided to raise investment as the primary path to fund the business. Very quickly, as CEO, securing investment became my full-time job. I knew that pursuing grant funding or traditional business loans were options, but my bandwidth seemed so limited that I focused almost exclusively on seed capital. In retrospect, pursuing parallel alternatives would have actually saved time and stress over the long run.
Focus on Seed-Funding Statistics
Many factors can affect the availability of funding sources. Even in the best of times, raising investment funds is a lengthy, challenging process. It’s especially problematic if you are not paying close attention to timing, your business needs can’t wait, and you approach the investment community during a downturn in the market or when tax laws are about to change. Timing, connections, and factors both within your control and outside it make investment funding a highly speculative process.
According to the PitchBook-NVCA Venture Monitor, though the amount of investment into seed deals in the U.S. remains steady, deal volume has been slashed in half since 2015 and the trend continues. With the same dollars going into fewer deals, the bar is higher for seed-stage funding than ever before. Yet entrepreneurs routinely risk their livelihood and the success of their company on being one of the less than 800 companies that successfully raises seed capital in the U.S. each quarter.
Create Parallel Plans
Having a Plan B (and C, and D) that will keep enough money in the checking account seems very sane. Yet most entrepreneurs end up, as I did, in a repeatedly underfunded position. Scrappy companies can be good at being creative with very few dollars.
Sometimes being forced to do a lot with a little can lead to positive breakthroughs. But it can also lead to a desperation mindset in which the CEO makes shortsighted decisions. Be smart. Don’t repeat the mistake that so many failed entrepreneurs have followed, which is putting all your eggs into one basket. Use your creativity as an entrepreneur to extract value and revenue from more than one source.
A few examples:
- Partner with one of your best customers to win a research or product development grant, and utilize them as your testers. This is a double-bonus: your company benefits from the grant dollars as well as the research results.
- Pull out one specific piece of your product or technology and sell it as a stand-alone product or service.
- Strike a deal with a distribution partner to sell your product into a different market than the one you are currently targeting.
Having a Plan B may seem like a distraction. Or maybe having alternative plans may lead some to believe you are not committed to Plan A. But exactly the opposite is true. When you are able to reliably keep the lights on, you and your whole company gain the freedom and time you need to achieve your true goal.
Nikki Navta – marketbrief