Smart Ways To Secure Startup Funding

It’s not possible to build a successful startup without some type of funding.

At the very least, the founders need to be able to pay their living expenses in order to continue working on it and that money has to come from somewhere.

Also, if there are several players in the same niche that are all going after the same business opportunity, the one who has the most money to spend has the best shot at beating its rivals, achieving market dominance, and enjoying the outsized returns that come with it.

Finally, if you want to build a hardware, biotech, chemtech, medtech, or cleantech company, merely getting started will require a ton of money.

That’s why today we are going to share three strategies for securing startup funding and discuss their pros and cons!

Do This Before You Start Considering Your Funding Options…

Before you start weighing the pros and cons of different options, we recommend asking yourself these three questions:

What is the Outcome That You Want?

Generally speaking, people get into entrepreneurship because they want one of these three outcomes:

1. Build a lifestyle business that generates enough money to enable them to live the life they want. Typically, this means getting to the low six figures in annual net profit.
2. Build a scalable business that they can sell for a life-changing amount of money so that they would never have to work again. Typically, this means a seven or eight-figure exit.
3. Build a “unicorn” startup that reaches a billion-dollar valuation and allows them to not only create generational wealth but also have a massive impact on the world.

All three paths are completely valid so you need to look inward and decide what outcome you want to pursue.

What are Your Life Circumstances?

You also need to be realistic about the constraints inherent in your life circumstances:

1. What is the minimum amount of money that you need in order to pay your bills (your personal burn rate)?
2. Who are the people whose support you will need in order to pursue your entrepreneurial ambitions and can you get them on the same page?
3. How much time can you invest in building your startup while also meeting your existing obligations?

For example, if you are fresh out of high school, live with your parents rent-free, and don’t have any serious obligations, you can essentially do whatever you want. You could probably bootstrap a software startup with a part-time job at McDonald’s as long as your parents don’t kick you out.

Meanwhile, if you have a spouse and kids, your options are much more limited, especially if you are also the breadwinner. You will have to find a way to build your startup while still providing for your family and get your spouse on board with it because you won’t be able to succeed without their support.

Plus, you can’t just check out of family life for years and expect your loved ones to be okay with it so you’ll need to figure out how to grow your business while also being a present spouse and parent.

Everyone’s life circumstances are unique so no one can tell you what is the right path for you – you will need to decide that yourself.

How Much Risk are You Willing to Accept?

On a practical level, your risk tolerance is going to be significantly impacted by your life circumstances – the more obligations you have, the less risk you can afford.

However, it’s also important to understand that risk-taking is a personality trait: we all fall somewhere along the spectrum between extreme risk aversion and extreme risk-seeking.

This means that you should also take your general risk tolerance into consideration. After all, if you attempt to build a startup, at the very least you are going to be risking your time that could have been spent doing something else.

There are no guarantees of success in the startup world. However, the likelihood of success varies between different entrepreneurial paths.

Generally speaking, bootstrapped lifestyle businesses are the least risky and have the highest chance of success, while aspiring unicorns are the most risky and have the lowest chances of success.

Reality Check: 90% of Startups Fail!

There’s something called the optimism bias: the human tendency to underestimate the likelihood of negative events happening to them.

To put it simply, we tend to believe that we are less likely than the average person to get sick, get into an accident, become a victim of a crime, etc.

That’s why entrepreneurs tend to believe that their company is less likely to fail than the average company in their industry. Arguably, you probably need this delusional optimism to start a business in the first place.

After all, your odds of becoming wealthy through entrepreneurship are going to be much lower than your odds of accumulating wealth through a high-paying career, living below your means, and investing in the S&P 500.

However, this delusional optimism can and does backfire, especially in the winner-takes-all world of venture-funded startups.

The reality is that 90% of startups fail completely and only 1.5% of startups go on to have an exit of $50M or more.

And this is in the United States, the home of the world’s most important startup ecosystem, Silicon Valley. We can probably safely assume that in other countries, the numbers look even worse.

As an entrepreneur, you need to learn to temper your delusional optimism by reminding yourself that statistically speaking, failure is the most likely outcome.

That can help you think clearer about risk, make better decisions, and avoid wrecking your life. As the saying goes, hope for success, but plan for failure!

Strategy #1: Bootstrapping

What is Bootstrapping?

Bootstrapping simply means “self-funded” where you build your startup without taking any outside investment.

How Does Bootstrapping Work?

There are two main approaches to bootstrapping:

1. You live below your means, save money from your salary and eventually quit your job to build your startup, using the money you saved as your runway. The aim is to reach “ramen profitability” – the point where your company generates enough profit to cover your living expenses – before you run out of money and need to go back to work.
2. You live below your means, keep your job to pay the bills, and build your startup in your free time, using your salary to fuel its growth (e.g. pay for ads hire freelancers, etc.)

Needless to say, the former approach is more risky, so it’s probably more suitable for young people who have low living expenses, no serious obligations, and aren’t established in their careers yet.

Meanwhile, the latter approach is more prudent, so it probably makes more sense for those who have families and financial obligations and are already established in their careers.

The reason career is a factor here is that the more established you are, the higher the opportunity cost of an employment gap, both financially and in terms of your future career trajectory. Something to take into consideration!

Bootstrapping Pros and Cons

The main advantage of bootstrapping is that you have complete control of your business: you get to make all decisions, grow it at your own pace, and retain 100% of the equity.

As for the disadvantages, there are several of them:

Personal Risk

As a bootstrapper, you won’t be able to pay yourself a salary until your startup is profitable enough for you to do that.

Since failure is the most likely outcome, pursuing your business idea will likely set you back financially, not just in terms of the actual money that you invest in your startup, but also in terms of the opportunity cost of that money.

For example, you could have used it to pay off your mortgage earlier, invested it in the S&P 500, or simply left it in a high-yield savings account.

Slow Growth

Unless you are already wealthy, your financial resources as a bootstrapper are going to be extremely limited, which will inevitably slow down your growth.

This means that rivals with deeper pockets can be a serious threat. As Dan Kennedy put it, the one who can spend the most to acquire a customer wins. Money can buy market dominance. 

One potential solution to this is to focus on super niche business opportunities that don’t seem “sexy” at all, things like “CRM for HVAC companies”.

The smaller the niche and the less glamorous the business, the fewer copycats it will attract and the less likely those copycats will be to stick around for long enough to steal your market share. 

Moreover, opportunities like that are too small to be interesting to venture capitalists, so at least you won’t have to compete with VC-funded companies!

Mental Toll

Building a startup is going to be stressful regardless of which path you decide to take in terms of funding.

However, out of the three strategies that we are discussing today, bootstrapping is arguably the most difficult in terms of the mental toll that you will need to withstand.

Think about it: you either keep your day job and build your startup in the evenings and weekends, potentially working 60+ hours per week for years on end.

Or you quit your job, start working on your startup full-time, and watch your savings dwindle while you try to reach ramen profitability before you run out of money. No pressure!

Start by Bootstrapping if at All Possible!

If it is at all possible, you want to start by bootstrapping, even if you intend to seek funding in the future.

In fact, if you build a profitable business, you will have a much easier time persuading investors to write you checks.

As YC Group partner Brad Flora put it, investors want to jump on trains that are in motion. 

One example Flora gave was Solugen, a chemical manufacturing startup from Y Combinator’s W17 batch. 

Needless to say, making chemicals is a capital-intensive business. However, Solugen founders started by building a tiny version of their reactor with their own money, then built a slightly larger one that could produce enough hydrogen peroxide to sell and only then applied to Y-Combinator. 

Then, while at Y-Combinator, they started selling hydrogen peroxide to hot tub supply stores and got to $10k per month in revenue that way. Sure, it wasn’t much, but it was a start.

This enabled them to raise $4M to build their company. Solugen has since raised $400M and reached a $2.2B valuation!

Strategy #2: Indie Funding

What is Indie Funding?

“Indie funding” is a term used to refer to funds like TinySeed and Indie.vc that invest in startups that have the potential for a seven or eight-figure exit but will never become unicorns.

How Does Indie Funding Work?

Indie funding is similar to venture capital in the sense that investors are giving founders money in exchange for equity.

The main difference is that indie investors aren’t looking for 100x returns. As TinySeed puts it:

“To most venture capitalists, $10M in annual revenue is an abject failure. To us, it’s a great business.”

This also means that indie investors are much more flexible than venture capitalists because they don’t have the “to the moon or bust” mentality.

In fact, according to Rob Walling, the co-founder of TinySeed, their big thing is giving founders optionality.

Here’s how he explains it:

Indie Funding Pros and Cons

The main pro of indie funding is that it enables you to grow your much faster.

For example, TinySeed invests $120k-$220k in startups that have a $1k-$30k MRR in exchange for 10-12% of equity.

That money might enable you to go full-time, double down on your most effective marketing channel, or hire someone to help you out.

In addition to that, indie funds typically offer not just money but also mentorship, which can be extremely valuable for a first-time founder.

Finally, raising money this way can help you decrease the risk that you are taking without having to deal with all the craziness that comes with venture capital.

Meanwhile, the main con of indie funding is that once you take the money, it’s not just you anymore – you now have legal obligations to your investors.

In addition to that, they will also expect you to give them progress reports, answer their questions, and take their advice into consideration.

There’s also additional pressure that you might start feeling now that someone has made a six-figure bet on you. You don’t want to let them down, do you?

Strategy #3: Venture Capital

What is Venture Capital?

Venture capital is about investing in startups that have the potential to become billion dollar companies aka “unicorns”.

How Does Venture Capital Work?

Venture capitalists also give founders money in exchange for equity but their strategy is different from that of indie investors.

They invest in startups with the expectation that out of 10 investments:

• 4 will fail completely.
• 4 will either break even or return some low multiple on that investment.
• 1-2 will become unicorns and generate a 100x or higher return on their investment.

So the model is essentially betting on a lot of startups and hoping that the few winners will make the whole thing worth it.

Here’s how Rob Walling explains it:

Venture Capital Pros and Cons

The main advantage of venture capital is that it can enable you to grow extremely fast, outcompete your rivals, and become the dominant player in your niche.

Meanwhile, the disadvantage is that venture capitalists have the aforementioned “to the moon or bust” mentality: from their perspective, anything that is not a unicorn is a failure.

This means that once you take their money, you forego the option of building a sustainable business that generates seven or eight figures in annual revenue.

Your investors will push you to prioritize growth above all else for that shot at a billion-dollar valuation, even if it eventually destroys the business.

In fact, you might end up getting fired by the board if you refuse to play ball. And yes, you will have a board.

Consider reading this horror story. Stuff like that happens all the time in Silicon Valley, we just don’t hear much about it because founders who get kicked out from their own companies often have to sign NDAs in order to get their equity.

Speaking of equity, there are all kinds of shenanigans that VCs, board members, and even your own co-founders can pull to leave you with nothing. It’s “Game of Thrones” out there with San Francisco as a backdrop.

For example, here’s another horror story where a co-founder not only was forced out of his own company but also saw his equity reduced from 15% to 0.15%.

And just to be clear: we are not saying that venture capitalists are some cartoonish, top hat and monocle-wearing villains that lounge around smoking cigars and plot how to destroy founders’ lives.

They simply have different incentives than you do, which is something that you need to understand if you are considering taking their money.

Ask yourself: are you going into it with the same “to the moon or bust” mentality where you’ll either fail completely or build a billion dollar startup?

If you genuinely have this ambition and are willing to accept the risks that come with pursuing it, then raising venture capital makes sense because it’s the only way to have a real shot at success.

However, if all you want is to get rich and gain status, know that you can do that without chasing unicorns!

Sales Funnels: The Best Way to Grow Your Startup FAST!

According to the Y-Combinator co-founder Paul Graham, a startup is a company designed to grow fast:

“Being newly founded does not in itself make a company a startup. Nor is it necessary for a startup to work on technology, or take venture funding, or have some sort of “exit.” The only essential thing is growth. Everything else we associate with startups follows from growth.”

This applies to bootstrapped, indie-funded, and venture-funded startups. But what is the best way to grow your startup fast?

We would argue that the answer is simple:

1. Build a sales funnel
2. Drive targeted traffic to it

This is what enabled our co-founders to bootstrap ClickFunnels from zero to $10M in annual revenue in just one year. Now, more than a decade later, we are at $100M+!

Want to Learn How to Build Sales Funnels That CONVERT?

Our co-founder Russell Brunson is widely considered to be one of the top sales funnel experts in the world. Want to learn from him?

His best-selling book “DotCom Secrets” is the best place to start because it covers everything you need to know in order to build sales funnels that convert.

This book is available on Amazon where it has over 2,500 global ratings and a 4.7-star overall rating.

But you can also get it directly from us for free…

All we ask is that you pay for shipping!

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P.S. Here’s What Readers Say About “DotCom Secrets”…

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