Rippling, a company that aims to simplify HR & IT for employers has raised $250 million with a $6.5B value. Pipe, a startup that manages cashflows, presents an oversubscribed round of $150 million at a $2 billion valuation just over one year after it raised its $6 million seed round with Craft Ventures. In the meantime, the cult clothing company Rent The Runway has raised more than $500 million and went public with a price of $1 billion.
It’s easy to be jealous of the rapid growth and seemingly unlimited sources of capital that are accessible to today’s rock star founders, who appear on Saturday Night Live and move markets through sharing memes (we’re watching you, Elon Musk). Fundraising vast amounts of venture capital fast seem to be the best way towards startup success…or does it?
Many thousands of other entrepreneurs are working away in complete obscurity for every founder who makes headlines for their impressive amounts of funding. Within the United States alone, there are more than two million companies under two years of age. There is a myriad of startups that are not funded by VC that have grown into household brands. MailChimp, Shutterstock, CarGurus, SurveyMonkey, and Atlassian are only a few examples of companies that did not depend on rocket fuel from VCs to get off the ground.
In reality, the vast majority of the millions of companies created every year do not ever raise venture capital. There are no legendary journeys across Sand Hill Road. There are no chases for Patagonia jackets to VC conferences and no late-night conversations between Marc Andreesen in his Twitter DM’s.
But, a path to establishing a successful company without venture capital may generally take a decade or longer. However, overcoming the obstacles of starting a business with venture capital is incredibly rewarding.
Here are some helpful ideas to help you on your travels:
1. Developing products or services that consumers would be willing to purchase
well-known and capital-driven “land take now and business model to follow later” strategy. It doesn’t offer the best chance to succeed. It’s not difficult to launch Shutterstock. Jonathan Oringer bought a camera, made 30,000 photos, and then found an online store selling low-cost images he had created himself.
The product-market fit remains a factor in your products, and the first ones you launch aren’t much beyond an MVP. But they should be enough to convince your potential clients to see the value and then swipe the credit card and buy. Be aware that they’re not only paying for the service you offer now but also what they believe you’ll be in a position to become in the future. Why?
Finding revenue early can reduce the drain on cash and speed up its time to reach break-even. Many entrepreneurs aren’t comfortable with the idea of releasing anything less than or “the perfect product” don’t let perfection be the definition of “good enough” and a viable business since it’s effortless to waste millions of dollars and never reach that point. It’s important to note that revenue as a source of funding is not a dilutive source and instantly adds in a multiplier to the worth of your company. Make an effort to reach your first revenue as soon as possible and definitely in your first year.
2. Develop a business model that scales, that is effective, and allows for expansion.
A solid understanding of economics can help, but all you need is an understanding of fixed costs vs. variable costs. If your marketing and sales expenses are higher than your revenues, it’s tough to sustain a business. Many businesses get caught in the trap pricing (with margins) on variable costs and fail to consider the need to reinvest in fixed costs when growth is ramping up. Don’t be one of them.
As per the research conducted by JP Morgan Chase, organic growth is responsible for the majority of small-scale business revenues four years after its founding. Prioritize revenue-generating customers as early as possible, considering that the concept of product-market fit is still in place. Start as quickly as you can to minimize the loss of cash before you can reach actual margins and increase your odds of survival and success.
Balance is crucial. As per US Bank, 82 percent of companies fail because of poor management of cash flow.
3. Working capital balance
Another known issue that prevents you from building a successful business is not having the correct product price, distribution, or pricing. An experienced, knowledgeable businessperson will conduct their research and figure it out at the right time.
The biggest challenge that entrepreneurs don’t anticipate and that’s not difficult to tackle in real-time is managing working capital, and it’s a challenge that will only get more severe the more you expand. The process of scaling requires more resources, including staff or inventory, servers, and so on. These all cost money today. With either 30- or 60-day repayment conditions, the customer contracts could result in cash receipts that could be behind your growth in expenses by some months or even more.
The difference between what you have being collected and the amount you’re paying today is called working capital. A frequently-cited US Bank study suggests that up to 82 percent of companies fail because of poor cash flow management.
As we have grown Junction at an impressive 90+% CAGR in the past couple of years, working capital has been a significant issue that keeps me awake at night and something that we have meticulously managed for more than five years using an ongoing thirteen-month spreadsheet for cash flow projections. There are various non-dilutive financing options available to founders, and today they have more options than before. Explore Small Business Administration grant programs as early as possible and possibilities such as receivables and the ability to finance recurring revenue as you expand (e.g., Pipe).
If you’ve learned about this, you shouldn’t allow capital management cause your company fails to meet your objectives.
4. Pay attention to your customers.
One of the co-founders of MailChimp was taking up to 10 cross-country journeys every year to speak with small-scale business owners to figure the reasons for their struggles. MailChimp was able to take these conversations and turn them into innovative methods to make their lives more efficient. Ask questions, listen to note down your thoughts–this isn’t a moment to promote the business you have already built the company. It’s the right time to learn, listen and locate clients who will assist you in testing and developing new features and functions.
Customers would like to develop with you and are enthused in your growth with their own business and success. One approach we’ve used in Junction has been to offer a personalized service to our very first group of clients. My co-founder and I are involved in the relationships with our clients and will always remain so. The lessons learned from these conversations are unrivaled, and you’ll need many years of references to clients when the time comes to “level up” the clients you’re offering.
Establish and maintain these relationships. They’re crucial in the end to determine your success.
While identifying clients, adjusting pricing, and managing working capital won’t make extensive attention, they will aid in building a successful, lasting, and sustainable business. The idea of raising venture investors’ money for as long as possible and perhaps not growing it in the first place is a plan that many founders should consider. If you decide to go down this approach, stay clear of self-congratulatory VC tweets, and remember you’re on the route that more people walk than you’ll ever realize. We’re glad you’re here. We’re happy to be here with you.
Vineet Madan (@vimadan) is an occasional angel investor, former corporate venture investor, and founder and CEO of Junction Education, a market-leading learning platform-as-a-service that powers digital learning for Adweek, Front Office Sports, LingroLearning, Yale University Press, and other companies and organizations on the forefront of transforming education.