Words By Doug Nordman
As an angel investor, I've invested in nine startups over the last seven years. Six of those are still in business. I also help with Blue Startups, an accelerator mentioned in this post. Please contact me if you have more questions about them.
In my last post about veteran entrepreneurs, I shared resources to help you launch your own business. Their techniques use minimal capital and will work for every new venture. Whether you start a small online company to support your lifestyle or you partner with co-founders to launch the next tech giant, you'll make your transition from active duty with the same startup process. You'll use the same tools to find your customers, solve their problems, and gain traction.
What if you want to grow your business faster?
Startups grow faster with more capital. Your company's limit may be the size of your market, but for years your growth will only be constrained by how many customers you can reach. At first you'll promote your business online, but eventually you'll boost your marketing and hire more sales staff. Several founders on the startup website Venture Hacks claim that bootstrapping your own business with your own capital and sales revenue will help you grow between 20%-100% per year.
But what if you want to do achieve those growth rates every month for the next year? How do you scale exponentially instead of linearly?
The first answer might seem tempting: invest more of your own money. Cash in your Thrift Savings Plan, mortgage your house, and whip out your credit cards. There are dozens of stories of legendary founders who took the big risks for these big gains. However the media's survivor bias means you'll never read the stories of the tens of thousands of founders who spent themselves (and their families) into bankruptcy. You'll only see the statistical summaries of the inevitable failures that come from dumping too much cash into flawed business plans.
The second answer might seem obvious: borrow money. A lender can help you turn your next design into actual products and sales. Every business has different practices like customer discounts for early payment or long-term contracts, or borrowing money against your receivables, or using grants and small-business loans to lease equipment. All of those short-term techniques will work-- for a short time. You still have to show a lender that their cash will boost your sales to pay them back with a reasonable return.
The best long-term answer is more complicated: raise capital by selling your business a little at a time.
The math is compelling: owning 10% of a billion-dollar business is worth much more than owning 100% of a ten-million-dollar business. However founders hesitate to sell shares to investors because they're concerned about losing control. This risk can be reduced by keeping a majority of the seats on the board of directors and by having special voting shares. The best solution is growing the company so quickly that the investors want you to stay in control even while they're buying your shares (and giving you money).
Every startup raises its initial capital from the same group of people: founders, family, and friends. Once the business plan gains traction, founders traditionally pitch to angel investors by selling as much as half of the company's shares for another 1-2 years of capital.
Today, however, founders have many more options through Internet crowdsourcing. The biggest advantage of these options is their social proof! You're proving your business model to a larger group of investors, many of whom are also experienced entrepreneurs. They'll not only invest their funds, but they'll contribute their time and their networks. If you have a great idea then you'll quickly reach your funding goals. Better still, if you're struggling with these groups then you'll know that you need to pivot your model or even shut down.
The most public option is Kickstarter. Technically you're pre-selling a product instead of selling shares, so you still retain your equity. The real benefit of Kickstarter is the marketing and social-media buzz. If you generate that buzz with a great product and a compelling story, then customers will flock to your site-- and investors will follow.
Another choice is an incubator or accelerator. These have been operating since the 1990s, but today's best-known example is Y Combinator. The YCco-founders are successful entrepreneurs who raise their own operating funds from angel investors and venture capitalists. They screen applications from startups which might be as basic as two founders with a good idea, or fully developed with revenue. YC contributes capital and office space in exchange for an equity share of the startup, but their most important resource is their staff mentoring and meetings with successful entrepreneurs. It's the ultimate mastermind group, and the intense three-month session will prove your business model. More accelerators have sprung up across the nation, from 500 Startups to local chapters of TechStars to initiatives like Hawaii's Blue Startups. Check this veteran entrepreneur's resource document to find a group in your area or one that focuses on your niche.
Syndicates are a new version of crowdsourcing among accredited investors. A popular syndicate system is run by AngelList (founded by the same team that started the Venture Hacks site). Individual investors volunteer to head a syndicate as a lead investor, and other accredited investors pool their funds with the syndicate. Startup founders know that they're working with a successful entrepreneur who can bring business experience as well as funds, and they're talking with a syndicate which can handle most of their funding round instead of having to pitch to hundreds of individual investors.
Finally, as your revenue grows, consider your local angel groups to complete your seed funding. The chapters are networked with national associations and they're full of experienced business executives and entrepreneurs. They're happy to mentor local startups with advisors as well as capital. Instead of pitching a few accredited investors at a time, you'll be able to reach a larger group with a possible lead investor.
Once you've lined up your funding, you can return to your real job: building your exponential growth.
About Doug Nordman
I served in the U.S. Navy's submarine force for 20 years before reaching financial independence and retiring over a decade ago. My spouse retired from the Navy Reserve. These days both of us are enjoying our beach-bum retirement in Hawaii, where we were first stationed in 1989.
I wrote "The Military Guide to Financial Independence and Retirement" to share the advice and stories of over 50 other servicemembers and veterans. All royalties are donated to military charities (over $10,000 so far), and we're collecting more material for the second edition. Stop by The-Military-Guide.com to share your story and learn more about gaining your financial independence!