Starting a Software Company in a Difficult Fundraising Environment

Some would say that it’s never an easy time to raise funds for a startup software company. In general, I’d agree. Except for a few brief moments, such as the 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. Such as repeat entrepreneurs who hit it big the first time. Or companies in the Bay Area of California, and those anywhere with truly obvious ground-breaking IP. But for most, it’s a grueling and soul-sucking necessity. That’s true even for those in the tech industry, for who this often important task is curiously romanticized.

Software company fundraising is as tough as ever

Fundraising today for a startup software company is at least as tough as ever. The Venture Capital (VC) business has pulled back a bit with higher inflation and interest rates.  The exception may be seed rounds, as there still seems to be an excess of capital available. In some respects, it currently may be easier than is usual historically to get a few hundred thousand dollars in seed money. But getting a true “A” or “B” 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 apply to any company. But for those smart about it, a software-based business can be started and grown with minimal and sometimes even zero outside capital. This has always been true in the software business. However, several developments have made bootstrapping an even more realistic possibility today. But it is important to believe 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. That’s especially true for those previously working in large companies with all the trappings that come with that. But embracing the proper attitude early on is essential to bootstrap your company. At least in the beginning. 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, revenue, etc. Only after that do they put together an investor pitch and think about how much money to raise. But it can be quite helpful to have a realistic view as early as possible of 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, many things will dictate how much money you’ll have available. That includes management team reputation and track record, investment contacts, dilution philosophy, local investment resources, business model, IP, etc. just 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 consistently run across entrepreneurs who start enterprise software companies with complex products selling at high price points. This business model usually demands a team of outside sales reps and field engineers each costing $150-350K/year in total comp plans. Many startups won’t be able to attract the funding to support this sales model. Or utilizing a Software-as-a-Service (SaaS) approach, without building into the model the added operational expenses required with a SaaS model. Unlike the older on-premises software business model, with SaaS, the company essentially takes on the role of your client’s 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 should be taken that you don’t use any of your employer’s resources or do ANYTHING on company time. Ensure you aren’t violating any of the agreements signed with your employer. But once you stop working to start a new venture, there’s no telling when your income will start flowing again. So do as much as possible before cutting the cord with your steady income source.

Do it yourself and don’t be wasteful

Entrepreneurs often find that they can do things they never dreamed they could. When dealing with scarce capital, it’s critical to make sure you MUST pay someone else to accomplish a particular task. Before parting with your scarce cash. Be especially careful before committing to someone on a permanent, salaried basis. This approach will lead to personally doing a lot of mundane activities you don’t 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 paper clips!

The corollary to this is when you desperately need outside help, DON’T SKIMP. Certain critical tasks shouldn’t be handled by doing an unacceptable job internally. Bad marketing is an example of this for the technically oriented founder. Trying to do tasks you just can’t perform adequately can be truly penny-wise and pound-foolish. It 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 critical to the business.  Then save money elsewhere to 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 continuously matured to make development quicker than ever. AI is accelerating that trend. Target platforms usually have fewer memory constraints, reducing the time needed to produce extremely memory-efficient code. Many pre-built modules are available for standard functions at a modest cost or even free. 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 you scour all pre-existing resources for things that can be used. 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 reduce your costs significantly and expand the availability of critical development resources. Almost everyone would prefer to have developers under their roof. But 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 that many early-stage software companies initially ignore for their products is sales in international markets. It’s natural to want to focus on your domestic market first. And at the VERY beginning, you should! But doing this exclusively for too long can cost you some excellent growth opportunities. 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 most 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 overseas. In addition, you can partner more easily in many international markets with distribution partners having existing market presence. These partners can reduce the marketing investment normally required to gain traction. Done right, this can mean an excellent return on a modest investment. Once you’ve invested so much to create valuable, perishable product IP, don’t limit your return on that investment by focusing on narrow geography for too long.

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

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

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

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