I’ve never seen a B2B company get to anything much under 18 months. — Steve Wood, Serial Entrepreneur in B2B
Startups are hard.
It can take anywhere between 6 and 36 months to get a business off the ground… and that’s when the market conditions are good.
To win, founders need to be ready and willing to go the distance.
This means they need to find every way they can to shorten their Time to Product/Market Fit, stay resilient, and extend their startup runway as much as possible.
When I started my second startup, HireVoice, I had 0 income streams, and little money in the bank.
Very quickly, I was forced to cut my budget, and go on my line of credit.
Although, in general terms, having little to no money can make you more scrappy, the financial pressures can quickly bear down on founders.
My experiences lined up with what researchers Joseph Raffiee and Jie Feng had shown; founders who quit their jobs early are more likely to fail. The added stress of forgoing a paycheck impacts their ability to make good decisions.
I wasn’t thinking straight… I was always thinking about money, which is one of the reasons why I ended up pulling the plug on HireVoice.
Several years later, when came time to start another startup, I knew I had to find ways to increase my ability to take risks.
Since all founders get caught in this problem, I created the following list of options for extending their startup runway.
- Using Personal Finances to Extend Your Startup Runway
- Using Revenue to Extend Your Runway
- Seeking Investors
- So, What’s the Best Way to Extend Your Startup Runway?
Using Personal Finances to Extend Your Startup Runway
Your Own Savings
- Pros: In some ways, tapping into your savings to fund your venture is the ideal solution. You get to keep all control, and you become your own investor. Since you’re using the cash you have, you don’t pile up debts, and you know how long you can fund your startup. It can be a good approach, however…
- Cons: Funding your own startup means you’re not accountable to anyone else for how the money gets spent. This can mean spending on the wrong things, or spending for way too long. Once your ego is on the line, it’s likely you won’t know when to pull the plug. At the end of the day, if the investment doesn’t pan out–80 to 90% of startups fail after all–you can wind up with a big hole in your personal finances. As the saying goes, it’s always better to be spending someone else’s money…
- Pros: Using credit can give you the flexibility to decide when to spend, or double down. Whether it’s credit cards, or a line of credit, it’s generally possible to access the funds quickly, without the approval of anyone else.
- Cons: With yearly interest rates as high as 25%, it can take years to repay any investment you make. In fact, you’ll probably end up paying it back multiple times. Although founders have managed to grow businesses off the back of credit cards, it’s more of a malpractice than a strategy you should consider for extending your startup runway.
- Pros: Unless you’re willing to mortgage your house (or other assets you own), banks generally won’t be an option. Banks hate risk. They’ll rarely agree to loan money to startups. Since they need assets to back the loan, that’s generally a non-starter.
- Cons: It’s just not going to happen.
Using Revenue to Extend Your Runway
- Pros: Revenue is the best, and healthiest way to extend your startup runway. By getting customers, or prospects to buy or pre-pay for a product, you can fund growth and development to keep the lights on. Generating revenue is also a pretty good sign that a market needs the product you’re making.
- Cons: Depending on the market or industry you’re in, pre-selling may not be possible. Clients may want to see a working solution before they buy. More so, to effectively extend your runway with pre-sales, you’ll need to sell big, which may ultimately lengthen your sales cycle. Although funding your startup through sales or pre-sales is very healthy, it may not be enough. Early on, you may need two or more sources of income to support your venture.
Keeping Your Day Job
- Pros: Guaranteed income. Since there’s a lot of waiting time in the early days of startups, keeping your job is actually feasible. It’s also a way to experiment while maintaining the safety of a full-time wage. As you explore and gain validation, you can gradually reduce your working hours. Note: Working in a company can be a great way to find good business ideas.
- Cons: Between your job, and the commitments of regular life, you might not have a lot of time or energy left for your startup. This may significantly limit your ability to make real progress. Having a day job means you’ll almost always be choosing between you startup and other engagements. It’s one of the reasons why building a startup is generally easier when you’re young, and have few commitments.
- Pros: Freelancing or consulting is one of the main ways founders to extend their startup runway. Depending on their expertise, and their rate on the market, it may be a good, quick way to inject cash in the business. By picking your clients carefully, you might even be able to turn your consulting work into an actual business opportunity (e.g. clientstrapping).
- Cons: This is how I was able to fund my work on Psykler and Flagback. Although there are ways to control your schedule a little more (e.g. by blocking days, by only accepting short contracts, etc.), consulting can make it difficult to keep focus, and build momentum. Since it’s also very difficult to turn down money, you may also end up getting sidetracked by well-paying consulting opportunities.
Add-on Product Revenue
- Pros: Add-on products is how I was funding my third startup, Highlights. (e.g. book sales, courses, and some affiliation). This approach not only reduced the financial pressures, it allowed me to monetize assets I had created, and since sales were quite transactional, it allowed me to put most of my energies into building my startup.
- Cons: It’s not easy to make add-on products work. Not only do they take a lot of time to build, they’re also not as passive as one might imagine (products don’t sell themselves!). If you don’t have add-on products that are generating income, you might need to take a few steps back to make your situation more sustainable. Whether that’s the right strategy for you is worth evaluating.
Micro-Tasks & Micro-Projects
- Pros: Depending on your skills and skillset, you may be able to earn a side-income by performing micro-tasks (e.g. designing logos, doing user tests, translating content, fixing bugs, etc), or doing small projects. Because the projects are short, you can better control your workload, and schedule. (Note: entrepreneur Bart Boch shared a great list of micro-projects here).
- Cons: Depending on how much money you need and your past income, this may feel like working for nothing. It may also feel like you’re cheapening your personal brand. This type of work might feel like a distraction more than anything else. Although there should be less client management and fewer meetings with micro-projects, you may not be able to escape those completely.
Friends & Family Rounds
- Pros: Your friends and family know you best. Because they know you, and what you’re capable of, they may be more likely to invest in your venture. Since they’re not professional investors, their expectations for a return, and the pressure they’ll put on you will be a mere fraction of what you would get from professional investors. This can be both a blessing and a curse.
- Cons: If your startup succeeds, you, your friends, and your family will make money (Great!). However, if it fails… you run the risk of damaging many of the most important relationships in your life. Most startups fail. Beware of raising money from friends and family.
- Pros: There are a lot more angel investors than investment firms. Angel investors can be a nice alternative sitting somewhere between friends and family and VC firms. Because angel investors have often been entrepreneurs themselves, they can generally provide helpful guidance too. The timetable and expectations for angel investors will also generally be lower than VCs’.
- Cons: Deciding to raise money from angel investors sends you down a certain path for your business. The expectations for growth and progress will significantly increase. Since angels often work alone, they’ll rarely be the ones leading an investment round. This may mean having to find other investors to complement their investments.
Venture Capital Funding
- Pros: If your startup has the potential to become a market leader, and you’re looking to grow fast, venture capital may be the best path for you. There are a lot of really good VC funds, so you can find a good partner that will open doors for your business, and help guide your progress as the business accelerates.
- Cons: Most businesses aren’t a fit for VC firms. Even if your business could raise from VCs, it might not be what you want to do. Raising money from VCs means going for the Grand Slam with all the pressure and expectations that come with it. Raising this type of capital is a decision that will be difficult to revert. Since fundraising can often take 6+ months, it may also feel like a significant distraction.
Independent or Bootstrapper-Friendly Funding
- Pros: There has been a growing number of new investment vehicles coming up the past few years. Funds like TinySeed and Calm, for example, are aimed at lifestyle entrepreneurs and bootstrappers, while platforms like Pipe and Founderpath provide funding without expectations of a liquidity event (e.g. an acquisition). These options allow founders to get capital without giving up much control, or needing to change their strategies.
- Cons: Although these funds and platforms are mostly designed for bootstrapped founders, they generally require a certain level of validation before they become valid options. Since it’s not all business that qualify, early on they might not be real options for you.
Grants & Contests
- Pros: There are many types of grants and contests. Most grants can’t be obtained without giving away equity. The money will generally be tied to certain activities or milestones that your startup must meet. For example, in Canada you might be able to get grants for hiring people of certain backgrounds, including certain types of multimedia components in your product, or doing more Research & Development (R&D).
- Cons: Most grants and contests won’t bring in game-changing amounts of money. Since every program will need its own pitch, the amount of work and preparation needed to receive the money may not be worth the trouble. In jurisdictions looking to boost innovation, there might be an overwhelming number of grants and subsidies available, which is both good and bad.
- Pros: Equity crowdfunding has grown a lot these past few years. With crowdfunding, you get to raise capital from hundreds of, often smaller, non-professional investors. This usually means that you get to keep control over decision-making, and are able to raise multiple additional rounds as your company grows. In short, you can keep control and access extra capital as your company grows.
- Cons: Equity crowdfunding has yet to be legalized in all countries and jurisdictions. Although this type of funding is more common in B2C, there has been a growing list of successes in B2B. Since you might need to do a lot of campaigning in order to attract investors, equity crowdfunding can be a big distraction when fundraising. It’s important to weigh that investment before diving in.
So, What’s the Best Way to Extend Your Startup Runway?
The best way to extend your startup runway will depend on:
- The type of startup you’re working on
- The expected timeline (note: getting a startup off the ground always takes longer than you think!)
- Your ambitions
- Your availability and time commitments
- Your personal financial situation
- The financial situation of your co-founders
- Your expected velocity (e.g. how fast do you want to go?)
- The funding environment
- The options at your disposal (e.g. not all startups can raise VC funding)
Sit down with your co-founders and discuss the needs of the team and everyones’ personal situations. The more similar everyone’s situation is, the easier it will be to align individual incentives.
At the end of the day, the right solution will probably be a mix of several options (e.g. grants + R&D credits + angel round).
No matter what option(s) you choose, make sure you keep a few options in your back pocket.
The market change, conditions change, and the last thing you want is to get caught with your startup over-extended.
More on Extending Your Startup Runway
- 12+ VC Funds and Accelerators B2B SaaS Entrepreneurs Should Know
- How to Raise a Seed Round in B2B
- Should Your Startup Go After the Enterprise Market, or Can That Wait?
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