Mark Cuban is one of the most well-known investors in the U.S., thanks to making investments in dozens of companies and his starring role on Shark Tank. Here’s a great quote from him: “Once you raise money, that’s not an accomplishment. That’s an obligation. Now you’re reporting to whomever you borrowed or raised money from.” Too many founders I mentor view raising money as a major milestone on the way to success; bootstrappers are the exception, not the rule.
The Inc. article Mark Cuban: 1 Costly Mistake That’ll Kill Any Brilliant Business Idea (He Sees Entrepreneurs Do It All the Time) makes this point in its sub-title: Too many entrepreneurs think this is a required step to make their business successful. It’s not.
Author Betsy Mikel focuses on the issue of control: once you bring on investors you run the risk of them disagreeing with the vision and direction of your company.
Cuban expands on his advice on bootstrapping: “The secret ingredient to be successful though, Cuban says, is that you have to be really good at what you’re doing. Whether it’s hair products or tacos, being the best at what you do will make you stand apart. Those are the best business that grow the biggest. And anybody can start them.”
There’s another reason to bootstrap: you increase the value of your company by focusing on gaining customers and the revenue you need to support your venture. That means that if and when you do decide to bring on investors your venture will have a higher valuation; you can sell fewer share to raise an equal amount of capital.
We just had an entrepreneur come in for mentoring who was trying to decide between focusing on a single market and pursuing what looked like hot opportunities in a wholly different market. One of the mentors made the point that if his strategy was to bootstrap then “cash is king” – meaning he probably should grab business and revenue wherever he can get it. But on the other hand, if he plans to bring in outside capital he needs to be more strategic and focus on growing his share of a single market. Chasing other markets can be a distraction for the founder.
At the end of the day the single overriding reason to bring in outside capital and give up some ownership and control is to accelerate the growth of the company. As another mentor commented, this may be necessary in a tech-driven market, where as soon as you have some success – and with it visibility – the competition will be after you. To stay ahead you must grow rapidly. However, this entrepreneur’s venture was more of a services business and the need to fund growth to outrun prospective competitors is far less pressing.
One last important point from the article: referrals provide more value than investors. I advise every founder I mentor that their last question for every customer or prospect should be “who else do you recommend I talk with?” But another mentor made a complementary point: ask your existing customers for referrals to their peers. And this shows off one advantage of focusing on a single market: your customers should know, or know of, many of their peers, and thus be in a good position to refer you to them. Assuming they are satisfied customers! So bring your prospect list to the next meeting with your customers and ask for referrals. The worst they can say is “no, I can’t help you.”