For many founders, even after piloting with customers, there’s a gap. They’re left wondering: How do I take my startup from cold start to financially self-sustaining? As a founder myself and having coached many others, I find most don’t even realize there’s a choice. The flood of venture capital success stories in the media makes it seem like they’re late to the game, but many other stories are not represented.
What if you swam across the current instead of with it?
As an entrepreneur, I believe your business model makes your life aims possible. Of the founders I’ve known, some started businesses to prove their own worth, shed a ceiling on their income, change the world, give something big to their kids, passionately serve people who share a problem, see their friends every day, get control and so on. This acts like a North star on business model questions like: Who is your customer? What can you do for them? How do they decide to buy your offering? How do you exchange value and deliver?
We can measure the relationships between these choices using a financial model. Usually algebra links leads, customers, revenue, cost to acquire customers, retention, cost of goods sold, direct expenses, overhead, staffing and net income. Doing this month over month reveals a gap in time and size at the start to help you determine how much money it will take to reach steady profits. Money has other considerations too: Money to achieve what? Money from who, with what conditions and return?
It’s your choice. You have to live with what best fits your life aims. There are four basic ways to cross the gap.
- Bootstrapping: Fund it yourself, or with friends and family who want you to succeed.
- Grants: The need is so intense to a third party that they’ll pay you to address it, even without known financial returns.
- Debt: Promise to pay someone back for using their money, with a gain.
- Equity: Sell someone a chunk of ownership in your company, a portion of profits and a voice in how you earn them.
To demonstrate what this choice looks like, let’s walk through four models that address the same customer and problem, using the example of public elementary school children who routinely arrive under-nourished.
1. You could form a consulting firm to assess the school, recommend solutions and monitor implementation
Your gap funding buys phones, internet access, reference library access, secure cloud storage and office software subscriptions to run a consulting business model. With professional services firms, a founder runs the risk of too little client work to survive, but her savings and network from a prior job more than cover that risk for a few months. She bootstraps her firm, slowly hires and keeps control and all profits. Profits depend on hours billed, so the model is not scalable enough for returns sought by investors. However, the firm may be bought by another consulting firm or food distributor.
2. A sliding-fee-scale family medical clinic develops custom plans per student
Covering the gap includes acquiring a hygienic space, phones and internet, a subscription for electronic medical records and billing, medical library access, light equipment, consumable materials and two physicians for coverage. The nonprofit’s executive director feels that diffuse impact from spreading efforts too thin is their greatest risk. He writes a grant to a foundation targeting just one set of conditions causing a downstream crisis in a single neighborhood. The negotiation bends operations to the foundation’s goals, and the clinic grows year over year into adjacent problems and grants.
3. A Greek yogurt producer sells kid-friendly flavors in squeezable pouches to elementary schools
However, they need a manufacturing facility, production equipment, trained staff and delivery transport to reach enough volume to break even. Armed with test-scale purchase orders, the founder finances the gap with a loan from a credit union secured by the equipment. The credit union gets monthly reports and can repossess the equipment if the company misses a payment. By satisfying pilot orders, much bigger purchase orders are opened, yielding cash after operations to pay the loan installments reliably. The founder allocates profits to finding more markets and distributors.
4. A marketplace app connects schools to local suppliers of nutritious food, charging a monthly membership fee to both sides
The more members, the more valuable the network becomes for great matches, so there’s a winner-takes-most dynamic. The founder feels that matching supply and demand across so many categories is her biggest risk, so she runs several experiments weekly. Her gap funding covers the costs of those experiments, plus the overhead of hosting her software platform and maintaining it. She pitches venture capitalists willing to engage in risk and secures a seed round. The early-stage venture capitalists get a seat on her board, regular reports and set the company on a trajectory to grow by a factor of 10 per year toward an IPO or acquisition in two to three years. The founder’s share count drops by 20%, but she now leads a more capable team and saw the value of the company double.
In each of these scenarios, the founder addresses the same problem but makes a different trade-off on both control and economics. At the extremes, there are high-growth, investment-first ventures and medium-growth, revenue-first ones. In the real world, founders blend sources of capital. A deep-tech venture, like a genetically engineered vegan protein, might have a bank line of credit, an SBIR grant and angel investors at the same time.
The fit between your company and capital holders depends on the willingness of the capital holders to engage in your risk profile. For example, social impact investors now play a big role in clean tech at the bleeding edge, making it safe for financial venture capitalists next. Some serial founders may find no fit other than bootstrapping, allocating their operating profits from one venture to grow another.
This was my story with my co-founders over 12 startups in 22 years. It felt slow but flexible overall. At the start we prized a tight circle of obligations so we could change our minds. We were young, worked long hours, dispelled a lot of myths and earned little. A few years in, we started multiple businesses simultaneously to smooth total revenue across several streams for more stable lifestyles. We married, bought houses and had kids. In our last five years, we paired back to one company to simplify the noise in our heads and positioned it to take venture capital because we were older and wanted to go faster. We’d seen so many businesses that launching a rocket captivated us.
Remember, you have choices. Your business model constrains options to fund your gap. Your choice can evolve over time, but you’ll re-negotiate your commitments to your investors, lenders, grantors or even your family. You’re not alone. Ask other founders, “What was it like to live with your funders?” You’ll find your fit.
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