When we decided to start a tech company, we often found ourselves discussing the possibility of receiving funding for growth. The road to building a tech company has had its highs and lows. We often find ourselves asking, when is a good time to reach out for outside funding? Should we have obtained funding from the beginning, or was it better to establish our model and strategize first before looking for investors?
Of course, not receiving funding has had negative and positive outcomes, so we thought we'd share what we've learned so far and hopefully open a discussion amongst entrepreneurs and business people alike. I listen to tons of podcasts and there are a lot of people with different views on this topic. For example, Reid Hoffman, founder of LinkedIn, says it's important to raise more money than you even think you need because you will always need it.
On the contrary, Gary Vaynerchuk, entrepreneur and owner of Vayner Media, questions heavily up-front funded tech companies. Gary’s philosophy is that in real business the goal is to make a profit, reinvest that into the business, and grow it.
"There’s a misconception that just because a VC or “angel” throws cash your way,
hoping that you’re the next Zucks, that your startup is going to be successful.
But that’s not how it works. It’s the market that decides
what works and what doesn’t." - Gary Vaynerchuk
Tim and I were not your typical tech founders. We didn't even consider getting funding in the early days, mainly because we didn’t know any better. We ran into moments where there were some tight cash situations and we definitely learned some valuable lessons from those experiences. As a first-time founder, I got a real-life MBA class in cash management early on. Our main advantage was that we knew the business inside out so we managed to do what needed to get done in order to survive. Our disadvantage, however, was that when we ran into those survival moments, we had the stress of the unknown with no safety net to fall back on.
We have met with several funding companies and they were very engaging, it was a positive experience for us. The energy in the tech community is awesome, their sharing and helping approach is more evident than many industries I've seen. They were impressed when they saw our numbers and how many advisors we had managed to sign up on the system while maintaining active users that were cash flow positive. We earn money from each claim that goes through system, so revenue has been generating from day one.
We received some challenging questions from these funding companies, and in all honesty, we answered them based on how our business was running. Looking back, we wonder if we should have said what they wanted to hear, but we put forth our most authentic selves. Here's a run-down on how those meetings generally went down:
1. What is your CPA (Cost per Acquisition)? Umm… well the founders actively made connections on LinkedIn and offered the advisors a demo. From that approach, 99% would sign-up and actually use the system. We were fortunate enough not pay for any acquisitions and just invested our time on LinkedIn. There was huge value in this and with the profits we are now investing in tracking and deploying marketing dollars to track COA and I suppose we will see where it takes us.
2. Why do you use advisors? Not many funding companies liked this initially. They REALLY didn’t like this. They thought the software would cut advisors out rather than be a helpful tool. We would have many debates on this point as there are two main distribution channels and ours, with advisors, is lower cost and risk. Where other tech start-ups often hire young, typically inexperienced sales staff, we had hundreds and thousands of experienced advisors selling our products to their clients. As my partner, Tim, always says “It is easier to be re-elected than elected”. Our advisors have thousands of clients that trust them and are always out gaining new ones. Soon after, Zenefits in the US pivoted to only go through advisors and this reinforced our commitment. As more people embrace tech, we think it positions us well. 3. You don’t have a CTO?
Well... for this one we had no answer and man, were they bang on! They said it was insane that we got to such growth and still did not have our own in-house CTO. We knew in our hearts they were right, and we began to search for someone who could fill this role and support us in how we operate in a positive way. The one dagger here though is we were told it was going to be difficult to find a CTO in Calgary and that we would have to consider outsourcing to Vancouver or Toronto. This bothers our current CTO (we love that), who is in Calgary with us. As it turns out there is a ton of great tech talent in Calgary and as we grow we can prove this.
"turns out there is a ton of great tech talent in Calgary
and as we grow we can prove this"
Funding is a valuable thing to have, there were certainly moments in our tech start-up where we realized it could have saved us a headache here and there, although we opted to go without. As we continue to learn about the busy and ever-changing world of tech, we always maintain an openness to conversation about how can more money AND a funding partner help to grow the company to new heights? We know that cash is king and if deployed properly, it can make a world of difference. However, there is something to be said about growing a business the old-fashioned way. The idea strikes, you sell it to people, get revenue and reinvest the money to keep growing. This creates a sense of self-sufficiency and stability.
Can funding make you lose out on acquiring much needed experience? Should you first commit to strengthening your brand and wait for investors to believe in your vision, or should entrepreneurs first seek out investors and gain the means to make their vision a reality?