Tag: fundraising

Too Much Capital or Less Capital, that is the Question

There are so many entrepreneurs and founders who believe that injecting more capital means more success, but this is simply not true. The race to raising more capital leads to greed, which doesn’t end well if you don’t have a direction.

On the other hand, if your focus is to get less capital, not only does it make you rich as an entrepreneur, but it also enables your business to grow. The most prominent example of this case is of Zappos and Wayfair.

 

Importance of Being Capital Efficient

Everyone in the VC world  is aware of the success experienced by Zappos. They secured investment from some of the best venture capitalists in the market and made it big with an unorthodox approach. The company was later sold to Amazon in a deal between $850 million and $1.2 billion, wherein, the founder secured $214 to $367 million.

An even better example of e-commerce success was laid out by Wayfair. It was a brainchild of Steve Conine and Niraj Shah. Instead of raising external capital, they bootstrapped their idea and turned it into a successful business. They purchased a large number of SEO friendly URLs, generated huge traffic, and optimized against Google’s algorithms. It started generating money right from the beginning and despite many offers from venture capitalists, they refused all offers until they reached $500 million revenue.

In 2014, Wayfair went for its initial public offering (IPO) on the New York Stock Exchange. In fact, each of its partners made as much as all the shareholders of Zappos made. The secret to their success was a capital efficient business. They only raised money from the outside when their firm had become valuable.

The co-founder of Wayfair made 10 times more than the founder of Zappos.

 

Limit Raising Capital in the Beginning

Although, some might associate the Wayfair’s success to the size of the furniture market, yet, shoe market is basically a better fit given low shipping cost, repetitive customers, etc.

There is no doubt that industry dynamics also contributes to the company’s success, but Wayfair made it big by employing an effective capital strategy. They did not raise any capital at the beginning, nor did they ask for it to speed up the early growth despite having offers from venture capitalists.

The only time they went for external capital was when they wanted to expand on a massive scale. They did not hesitate to take a huge amount of money and gathered three times higher than what Zappos did. However, they went for it only when the business had established its name, had minimum dilution, and could generate huge profits.

 

Why Should You Secure Money Later rather than Sooner?

This is one of the most important question. From the two scenarios above, it is obvious that Wayfair made much more money as compared to Zappos. Tony Hsieh, the founder of Zappos, said that he sold the company to Amazon due to the pressure imposed by its shareholders. Despite making a lot of money, giving in to the financial decisions made years ago was quite frustrating. Hsieh might have made it as big as Wayfair did, if he had more control over the decisionmaking process.

At the time of the IPO, Wayfair founders owned over 50 percent of the business and had managed to raise capital on their own terms with very little dilution. This enabled them to exercise more control over the financial decisions, which is also reflected in the success.

 

Overcapitalization Leads to Limited Optionality

When it comes to taking a financial decision, overcapitalized businesses usually end up with two choices:

  • Take millions of dollars in investment and fail
  • Make money for venture capitalists or go bankrupt and fire your entire team

But Wayfair, on the other hand, made a lot of money due to the lean financing strategies of their founders. It also enabled them to retain their right of Optionality. This gave them a choice to sell on the basis of their risk appetite or business performance, and not based on their capital structure. Just because you have become a multi-million dollar startup, doesn’t mean you should not raise money down the line.

 

It is important to understand that raising too much capital has its downsides. Therefore, efficient decision making should be employed to be able to spend your money wisely.

Is Funding Your Startup with Venture Capital Always the Right Choice?

With the rapidly growing tech-world, it has become quite common for startups to fuel their ideas with funds injected by venture capitalists (VCs). Whenever you pick up a business newspaper now, there is mostly something written about VCs or the early stage businesses that were funded by these investors.

  • But is it always the right choice?

In today’s fast pace environment, everyone wants to make huge profits as soon as they possibly can. However, as the old saying goes, “haste makes waste.” This is also true for businesses.

Although, venture capital investment may be a good choice for some businesses, yet, it comes at a cost of coping with high expectations held by these investors, which also results in many startups to fail. The fact is, new ventures do not need such investments all the time. Besides, simply because you are a tech-company, doesn’t necessarily means that you have to have your office in the Silicon Valley. There are many companies in the world of technology that grew organically and made it big. Though, the progress was slow, it was steady and made them even stronger as they made it to where they are today. One such success story is of the MailChimp. Started as a design consulting firm, providing email service as a side project, the company touched a revenue of $280 million last year in 2015.

Dan Kurzius and Ben Chestnut started the company in 2000. Some of their clients were demanding a solution to engage their customers by email, so they tweaked some old codes that were used for an unsuccessful online greeting card business. For the next few years, this project was run parallel to their main business. In 2006, however, they started having reservations. Having the entrepreneurial family background, both the founders were passionate about helping small businesses grow. Despite being in a critical state of its growth, they knew MailChimp was a low cost marketing channel for small scale business firms. So, in 2007, they packed up their web design business and shifted their entire focus to email service. So, what made it such a huge success?

 

Valuing What Your Customer Needs

Even when the company was fully focused on providing email marketing service to its clients, they faced a host of larger and better funded competitors, including Constant Contact.

  • What kept MailChimp retain its clients?

It was the trust their customers had placed in them. Chestnut said that it was their close connection with the customers that their rivals didn’t have. They knew what their customers wanted. They offered affordable services, which also allowed greater customization to cater the customers’ needs.
Learning to Make Money is More Rewarding than Spending it as a Startup

Co-founder of Basecamp, Jason Fried, said that you learn bad habits from raising money, for example, if you have some cash in your bank account, it makes you good at spending it. But on the other hand, if you have to earn it yourself, it makes you good at making it, which is a good habit for an entrepreneur to learn sooner than later in running a business so as to survive without relying on other people’s money. For MailChimp, learning to make money instead of spending it were just the essentials to keep their business running.
Understanding A Small Business is the Key

Although, MailChimp was approached by many potential investors from time to time, but Chestnut says that every time they had rendezvoused with investors, they failed to understand the gist of small business. They wanted to see the company at an enterprise level with a large number of employees
Chestnut further said that they were often told that they were sitting on a gold mine, but something about this idea never felt right to them. For the founders of MailChimp, it was all about proving to small businesses that they can do it just like Chestnut and Kurzius made it happen. Being a small business itself, this mail service company could understand the requirements of other small businesses fairly well. Despite the high level of uncertainty that persists in the tech-world, both of them feel that the company will run better if they control it rather than the outside investor.

Therefore, a startup doesn’t always have to let venture capitalists control them by fueling their ideas with a large amount of debt. Instead, they can be the pirate of their own ship and sail it through highs and lows the way they desire.