Although venture capital is a great resource for many startups—helping companies raise funds and gain expertise in their quest for growth—not every new business is best served by it. Venture capitalists' (VCs) primary goal is to sell their investment in your company at a large profit, typically by driving rapid growth. VCs take a “portfolio" approach to their investments, meaning they might invest in 20 companies thinking that three or four will succeed. This can be great for a startup whose concept is fully formed and is poised to become a large company, but the reality is that most companies go through much trial and error to fully execute and refine their concept before seeing success.
After founding UncommonGoods in 1999, it was a full five years before we saw a profit, and that was after dramatically reducing expenses to get on a more sustainable trajectory. We've been fortunate to remain independent throughout our history. If we had been VC-backed, we may have been pressured to sell the business, shut it down or abandon our socially responsible values when we struggled. So, if you decide not to seek venture capital (or are unable to secure it), here are three alternative approaches to consider.
1. Keep your breakeven low.
This applies to both you and your business. There's a reason so many startups are launched by young entrepreneurs with no major financial obligations—no mortgages, no children's tuition, etc. Your business probably will not make money at first, so the longer you can wait before drawing a salary, the more time your company will have to prove itself. Living like a college student until I started UncommonGoods at age 36 helped me save money and funnel the funds I needed into the business. And just as important as living frugally, running your business in a lean manner by keeping overhead to a minimum can also buy you more time to get your formula right.
Which part of your business needs the most cash? In the early days for UncommonGoods, it was salaries. We knew that we needed a first-rate leadership team—but we also knew that could be very costly. We decided to offer all our new hires the opportunity to trade some of their cash compensation for an opportunity to buy a stake in the company in the future through stock options. If potential hires are willing to take you up on the offer, the benefit is twofold: You save some much-needed cash, but more importantly, you have team members who will feel especially invested in making the company a long-term success.
For other companies, the biggest cash demands could come from things like inventory, equipment or rent. With inventory, I recommend negotiating with vendors on payment terms (i.e. a 45-day payment period, versus a 15- or 30-day payment period) or arranging drop-ship or consignment agreements. This way you won't incur the extra cost of storing or buying the inventory before it goes to customers. You can also pay by credit card, giving you at least 30 days to pay and up to nearly 60, depending on where you hit the billing cycle.
Other ideas to keep in mind are leasing versus buying equipment or looking at the used market. If you can (and are legally able to), run the business out of your home until it's absolutely necessary to move. If you're looking to rent, consider subletting space from another tenant—you can often get a better deal that way.
2. Maximize your outside income.
If keeping a low breakeven is not enough, consider alternative sources of income. If you have an established career, you might not want to quit your day job. If it's possible, try to work on your startup on nights and weekends for as long as you can. Or, if you do quit your job, do some consulting work on the side. I was lucky enough to be able to consult for my former employer, an investment bank, for several months while developing UncommonGoods. It allowed me to make some extra money and continue to build my network.
3. Seek other external funding.
If you've explored the first two options and still find yourself needing some extra money, consider government loans, grants and contracts. The Small Business Administration can provide resources to help you find a loan with a third-party lender.
Friends and family can also be a source of income—but I'd approach this with caution. As always, money changes the nature of relationships, and you don't want to risk alienating yourself from friends and family, or risking money they can't afford to lose. If that isn't an option, you could also try a bank loan, but realize that you'll likely have to personally guarantee the loan—so if your business can't repay, you're on the hook.
At the end of the day, you have to ask yourself what's right for you and your company. If you want to scale up fast, venture capital can help, but you'll be giving up control of your company in exchange. Although I tried (and failed) to obtain venture capital to start UncommonGoods, I now have the benefit of hindsight to see that our company would have been a venture-capital failure. And I'm here to tell you it's possible to fund your own way and become successful—if you're willing to make the sacrifices it takes.