Starting a Software Company in a Difficult Fundraising Environment

Some would say that it’s ALWAYS a difficult time to raise funds for a startup software company. In general, I’d agree. With the exception of a few brief moments, such as pre-Internet Bubble in the late 90’s where money was being thrown around like air, fundraising is hard. There are a few lucky folks that don’t sweat this startup task, like repeat entrepreneurs who hit it big the first time, companies in the Bay Area of California or those anywhere with truly obvious ground-breaking IP. But for most it’s a grueling and soul-sucking necessity.

Today fundraising for a startup software company is at least as tough as it ever has been. The Venture Capital (VC) business has shrunk dramatically from the perspective of the number of active firms, relative to before the financial crisis/great recession.  The exception to this might be the Angel market, which is more accessible with new online groups/sites and in some areas is picking up the slack left by the dearth of early stage VC investing. In some respects it may be easier to get a few hundred thousand dollars in seed money from angels and the newer, smaller early stage venture funds. But getting a true “A” round is tougher than ever; so if you’re building a startup company today it might be time to get creative and plan to make do with less capital.

Most of the ideas presented here are applicable to any type of company. But for those who are smart about it, a software-based business is one that can be started and grown with minimal and sometimes even zero outside capital. This has always been true in the software business but a number of developments have made bootstrapping even a more realistic possibility today. However, you will need to accept upfront that it can be done and structure everything you do from the beginning with minimal financial resources in mind.

Successful bootstrapping is tough if you’re a first time entrepreneur, especially for those that have been working in large companies with all the trapping that come with that. But embracing the proper attitude early on is essential if you’re going to have to bootstrap your company–at least starting out. Let’s examine some tactics that can increase the odds of startup success:

Understand early the level of capital you’ll have available

This is crucial. Most get going on their business, moving ahead and worrying about funding once they have a business plan, prototype/beta, etc. Only then do they put together an investor pitch and think about how much money to raise. But it can be really helpful to have a realistic view as early as possible how much money will be available to you in the early days. No question this is hard to do and almost by definition the result will be inaccurate. In reality, a number of things will dictate how much money you’ll have available: management team reputation and track record, investment contacts, dilution philosophy, local investment resources, business model, IP, etc. to name just a few. The key point here is to do your best to understand how much money you’ll realistically have available at startup and early on….

Structure your software company accordingly

….THEN design your business model to fit your forecasted available funding. In reality this rarely happens. Most design their business and then try to raise money to fund it. For example, I see entrepreneurs start enterprise software companies with complex products at high price points which demand a team of outside sales reps and field engineers costing $150-350K/year in total comp plans. Most startups won’t be able to attract the funding to support this type of sales model. Or adopting a Software-as-a-Service (SaaS) approach, without building into the model the added operational expenses required with a SaaS model, essentially taking on the role your clients IT department. If you can match your business model successfully to your expected capital resources from the beginning, your chances of success go way up.

Start your software company while you’re still working

One of the best things a startup entrepreneur can do is to start working on your business while you still have a job. This is especially true of the technically-skilled software company founder. Many software companies have been started by a sole programmer writing the initial product on his or her laptop, while sitting at home at night in the kitchen. It’s one of the beauties of the software business; you can create an initial product with very little capital investment. Of course, care needs to be taken that you don’t use any of your employer’s resources or do anything on company time. Make sure that you aren’t violating any of agreements signed with your employer. But once you stop working to start up a new venture there’s no telling when your personal income will start flowing again. So do as much as you can before cutting the cord with your steady income source.

Do it yourself and don’t be wasteful

Entrepreneurs often find that they can actually do things they never dreamed they could. When dealing with scarce capital, it’s critical to make sure that you actually NEED to pay someone else to accomplish a particular task before parting with your cash. Be especially careful before committing to someone on a permanent, salaried basis. This will lead to personally doing a lot of mundane activities that you don’t really want to do. Sometimes it’s unavoidable to take those duties on early on to conserve cash. Also try not to waste money on ANYTHING, not just labor. Count those paperclips! The corollary to this is when you really do need outside help, DON’T SKIMP and just do an unacceptable job internally. Bad marketing is an example of this for the technically-oriented founder. Trying to do tasked you just can’t do adequately can be truly penny-wise and pound-foolish and can cost you much more money in the long run than you save in the short term. Recognize what skills you just don’t have that are absolutely critical to the business; then save money elsewhere so you can afford outside assistance in those crucial areas.

Don’t reinvent the wheel

I referred earlier to it being easier than ever to build a software company with minimal capital. Development tools have matured to make development quicker than ever. Target platforms have much less memory constraints, reducing the time needed to produce code that is extremely memory-efficient. There are many pre-built modules for standard functions available at a modest cost or even free. Ten years ago it might have taken a half million dollars to build a quality website that you now can replicate for a few thousand dollars or less. As a software startup, make sure that you scour all pre-existing resources for things that you can use, before you build them yourself.

Outsource/off-shore software development, if appropriate

Another area responsible for much lower costs in starting a software business is the potential for outsourcing/offshoring. This isn’t for every company or every situation, but where it makes sense, it can both reduce your costs significantly and expand the availability of critical development resources. While everyone would prefer the developers under their own roof, in many cases there just isn’t the right talent where the company is located–or the budget available to fully staff with full-time onsite employees.

Don’t ignore software sales in international markets

A big area which many early stage software companies ignore initially for their products is international sales. It’s natural to want to focus on your domestic market first. But doing this exclusively can cost you some excellent growth opportunities, even from the very beginning. Depending upon the situation, I often recommend an international thrust as soon as you’ve built a reasonable initial customer reference list in your home market. This is particularly true for US-based companies. The US is the toughest market in the world. It’s the biggest, and the bulk of the software industry is located there (with all looking at the US market FIRST). As a result, the competition is almost always less in non-US markets. So there is low hanging fruit to be had. In addition, you can partner more easily in many international markets with distribution partners whom have existing market presence and can take on much of the marketing investment required to gain traction. All of this can mean an excellent return on a modest investment. Once you’ve invested so much to create valuable product IP (which is very “perishable”, by the way), don’t limit your return on that investment by focusing on a narrow geography if at all possible.

Don’t give up – and make sure you enjoy the journey

Don’t ever give up prematurely on your startup software company. The most important thing is to keep grinding until you start to gain traction. Starting up and growing a software company is an exciting–and extremely difficult–endeavor. Above all, I believe you need to be able to enjoy the journey, in addition to having your eye on the end prize– ultimate success. If you don’t embrace the process of getting to that end goal, it’s a lot easier to give up too early. There will be difficult times where you need willpower and stubbornness to push through. Often startup software success is found by staying alive long enough for good fortune to find you.

That’s my advice on starting up a software company and growing it in relatively tough times. Post a comment to add your own startup experiences.

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