When should a startup seek capital? Is more money always better?
The thought of venture capital is enticing. It would allow more runway to build out a product, more dedicated staff time to spend refining the product, which ultimately leads to increased customers and higher revenue, right? If not venture capital, should capital be raised by another means through loans or grants?
How should this decision be made? What are all the possible outcomes and what does a positive outcome dependent upon? Let’s take Glass Register for example.
Glass Register is a bootstrapped product that has been developed for the charity sector. It’s a donation processing system that is customizable for any marketer or fundraiser’s dream campaign needs. It’s already on the market and gaining customers across Canada. It’s revenue stream of subscriptions is sustaining minor refinement and development. But would more money right now give it a boost in order to develop more features and functions, smooth out the UX, provide better customer service, and explore other customer needs?
What are the possible outcomes?
- Continue to bootstrap and lean on sales team to increase subscriptions
- Seek capital and spend on development to build valuable features
- Seek capital and spend on marketing and sales
- Seek capital and spend on researching customer and industry needs
- Seek private grant to do aforementioned items
- Give sweat equity to developers/staff
- Halt development and recover sunk development costs so far
- Sell the product and company altogether
- Reinvest subscription revenue
What are the sunk costs?
Luckily, there aren’t many sunk costs other than the cost of development so far . Because there is a product at the end of the day and we’re not scrapping the whole thing, it’s hardly considered ‘sunk’. What is important to consider is rather than attempting to recover sunk costs, it’s better left ignored lest it influence your decision making negatively.
The decision you made yesterday or last month is irrelevant to today’s decision. It doesn’t matter how difficult the decision was or how much it cost you. It happened yesterday. It wasn’t made by you–it was made by a previous version of you, and the result is a gift from old you to new you. You can accept that gift if it’s valuable and walk away if it’s not. — Seth Godin
What are the dependencies?
In order for each possible outcome to come to fruition, there are many steps. Anything involving division of equity requires valuation and legal costs. Getting venture capital requires effort to seek out the right investing partner and meeting requirements necessary. Not seeking capital puts pressure on the sales teams. Grants require staff time diverted from product and business development. Halting is the easiest thing to do, but after working through the sunk cost fallacy, it doesn’t make sense simply to stop developing for the sake of recovering costs.
In this case to seek venture capital there’s the following dependencies:
- Get Valuation
- Figure out the amount of capital needed
- Develop specific business plan for return on investment
- Build out a large team of dedicated staff
- Find appropriate investors
- Create policy and legal documents surrounding equity
- Cost of legal
It’s not so easy even though the money is enticing. In this particular instance, Glass Register should NOT seek venture capital. More money is not necessary at this stage. Sales are on the rise. Development of more features, increased marketing, and listening to customer needs can all come gradually by reinvesting revenue back into the product itself. More money would be nice, but the dependencies required for a positive outcome highly outweigh the need for capital. Instead of being overly eager with dollar signs in your eyes, consider what you need the money for, how much you need, what’s the probability of a positive outcome, and what is your desired outcome contingent on.