Raising a Small Round Forces You to Bootstrap (And that’s a Good Thing)

Willis Wee
10:22 pm on Jan 31, 2013

startup bootstrapping

How many young entrepreneurs in Asia can raise more than $500,000 in seed funding? Not many, and valuations are usually low in Southeast Asia – mostly below one million for early-stage startups.

Having more money always makes you feel safer. But not having all the money you want could be a good thing too, especially for seed-stage companies in Asia.

With limited resources, the most obvious and natural thing for entrepreneurs to do is to bootstrap. You will try to save money on everything. You start taking budget airlines, eating cheap food, and negotiating hard on wages while instead trying to attract talent by giving stock options and also motivating and influencing workers with your vision and drive. Eventually, every time you spend, you tend to spend wisely and make sure that every dollar invested brings in the ROI. Personally, I think bootstrapping is an art and it’s best learned in near-death situations.

Sometimes, companies that raised a ton of cash just hire for the sake of hiring. The general rule is that you have to plan for 18 months and scale with the money you raised. So having raised $1 million, you tend to hire more and spend on nicer and bigger offices. But most of the time, you don’t really need that much money to find the right product-market fit. You don’t need to hire a sales team for a mobile app that doesn’t even have users yet. Pumping up the burn rate is a one-way street. It’s easy to hire people but tough to fire them to reduce your burn rate. And if you do fire people, it affects the morale of the team. The point is, with limited resources, you tend to be wiser with your spending and be more careful with your cash management.

I know, readers might think that there’s no harm raising more money. But if we don’t need the money, it’s better not to raise it anyway, right? Perhaps raising more money gives a better valuation. (Say raising $200,000 at a post-money valuation of $800,000 versus raising $500,000 at a post-money valuation of $2 million). But it doesn’t really make sense to have too high a valuation from the start. Rather, entrepreneurs should be fighting for a fair valuation which will allow your startup to progress and raise the next round more comfortably and – most importantly – avoid a downround situation. If your investment agreement has anti-dilution clauses, a downround can wipe the founders out of their equity, leaving them little motivation to grind hard for the company. The higher your valuation is, the riskier it gets in having a downround if you can’t grow fast enough.

Remember that having more money in the bank raises the expectations of investors. They will want $10 for every $1 they put in. If you raise money at a $2 million valuation, you’re expected to exit at $20 million. If you can’t keep up the growth, you pissed off your shareholders — and that usually isn’t a good thing.

All in all, it’s silly for entrepreneurs to focus too much on paper valuation when raising money. It’s paper wealth, not realized wealth. Raise enough money to guide your product into a market fit. Only then is it time to raise millions to scale and expand.

Thanks to Darius Cheung for his input.

(Image: Kwickid)

(And yes, we're serious about ethics and transparency. More information here.)

Replies
  • Jonny

    Great article, Willis.

    regardless if you raise many money still must bootstrap. i like this best >> it’s silly for entrepreneurs to focus too much on paper valuation when raising money. It’s paper wealth, not realized wealth.

    Very true man bro. More articles like this, we like.

  • B. Sng

    Agree, gd read. Being truth to investors is important. you raise enough money and not excessive money. entrepreneurs have a reputation to protect. u burn cash and fail, nevermind. but u must be honest, hardworking, and transparent.

  • Series X

    Higher valuation = higher exit right? I don’t see why that’s a bad thing. Cash is king, having that extra bit make the company feel safe. Just don’t spend recklessly

  • tdageek

    Nice one! For someone who worked in a small online team and close-to-zero budget, I really share your opinion. It also bothers me that there are number of handful startups with “halfway” concept that receives big funding. And quite often they ended up getting posh office space with tons of employees, and burnt s-load of money on print ads, billboards. Seen a number of them shutdown cos of the super high burn-rate.

    Getting shitload of funding does not guarantee success. It can be a double-edged-sword, it can mean growth or expansion, but at the same time it will boost your ego and makes you overconfident, lazy and eventually lose your focus. It doesn’t take 10 programmers to build a site unless you are creating some major software. You don’t need 3 designers unless your service require heaps of graphics. Skip the secretary, book your flights, set your schedule on your own. it’s not that difficult. Dont do a launching event as it is the most money and time wasting thing to do. If you have to do an event, dont hire models and celebrities, you dont have to hold it in the hippest spots, make it personal communicate with them yourself.

    There are many things you can do to build a strong product and team without burning holes in your pocket. At the end of the day, it’s the product/service that matters, not how many ads you have.

    Anyway, just wanted to add a few things or two. It’s nice to finally meet someone who shares a similar POV as me. Thanks!

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