Here are a few different ways to fund your start-up…
The “Burn Baby Burn” Approach
This approach involves raising as much money as you can up-front, and then spending it aggressively in the pursuit of revenue.
If you go down this road, it’s important that you can paint a big picture, because people who invest a lot of money into this sort of venture will need to believe there is a chance they will get an even larger amount of money back in time. So, hype it up!
The problem with this sort of approach is that it’s a big punt. Perhaps there won’t be quite as many customers as you think, or perhaps it will take you longer than you thought to convince them to buy. Either way, there is a possibility that you will spend all of the money you raised before you get enough revenue to cover your costs into the future.
If that happens you’ll find yourself needing to move from a high-cost model to a low-cost model, which is hard (especially if you’ve hired people you like). As Bernard points out, the big media companies are the latest group to experience this.
And, unless you can demonstrate momentum and find a way to talk an even bigger story, you’ll probably find it difficult to raise more money down the track if that’s required.
Of course, if you can get to break-even before you burn through all of your fuel, then you will have used other peoples money to fund the business to that point and hopefully have held on to enough of a stake for yourself to make it interesting.
The “2-Minute Noodles” Approach
This approach is all about keeping your costs as low as possible for as long as possible (i.e. living on 2-Minute Noodles), and trying to quickly get to a profitable position.
Maybe you fund it yourself from savings, or maybe you find a kind benefactor who is prepared to invest a modest amount of capital. Either way, it’s all about making a small amount of cash go a long way. Ideally all the way to a profitable business (or at least “ramen profitable”).
However, there are two obvious problems with this approach:
Firstly, it’s only really possible if you’re young (or stupid!) The rest of us already have too many expensive tastes and responsibilities.
Secondly, it can take forever, literally, so you need to be patient. In the meantime perhaps somebody else will come along with more resources (see “Burn Baby Burn” above) and take your customers before you can get to them.
Or, maybe it would require more investment (time and/or money) than your limited resources can provide?
Of course, if it does work, you are left owning most of a business that’s paying for itself, and generating cash. That puts you in a strong position to talk to potential investors, to re-invest in growing the business further yourself, or to simply sit back and enjoy the profits.
The “Hybrid” Approach
This approach involves using revenue from the consulting part of your business to fund your venture.
In other words you spend some of your time working for other people, so you have enough money to spend on your own ideas.
There is one big problem with hybrids, as Shai Agassi said in his TED talk this year (he was quoting Carlos Ghosn, the CEO of Renault/Nissan, and was referring to hybrid cars, but the metaphor is relevant here too):
“Hybrids are like mermaids: when you want a fish you get a woman and when you need a woman you get a fish.”
The obvious risk is that you find it difficult to wean yourself off your dependence on the comfortable salary your consulting work provides.
Or, perhaps you find it difficult to say ‘no’ to work when it is available, and as a result the consulting work comes to take all of your time leaving little space for anything else.
Of course, if you can find the right balance, this is a great way to fund a business without having to constantly scrimp and save and do everything cheaply, and without having to raise money from external investors.
There is no right answer
There are examples of companies that have been successful using each of these approaches. So, asking which is “best” is the wrong question, I think.
If you talk to people who have been successful in the past, I think you’ll tend to find that they will simply recommend the approach that worked for them. So, be careful in whose counsel you take.
The important thing is to choose.
Pick the option that seems right for you, and go with it.
Whatever you do, don’t get stuck halfway between – i.e. taking on investment (with the associated expectations that brings) but not really raising enough money to really go hard, or taking a “hybrid” approach as well as taking on external shareholders, etc.
And, don’t forget, how you fund your venture is ultimately irrelevant unless you make something people want.