Getting your startup funding is an essential skill for most tech startup founding teams. However…
The Self-Funded Startup: Make the Right Choices for Success
Some of the most impressive startups are self-funded — but launching your startup without investor capital requires increased attention to the financials. What does it mean to launch a self-funded startup in the modern startup ecosystem?
The Australian startup ecosystem is highly competitive in the aspect of obtaining capital from investors. Launching a startup is a generally a self-funded matter with data from Entrepreneur revealing that less than 1 percent of all startups successfully capture startup funding from angel investors, while just 0.05 percent are funded by venture capital firms.
With the majority of startups being self-funded, this covers founders obtaining launch capital from a variety of sources that include personal capital, family members, traditional finance, or even credit cards. The saturated startup ecosystem forces many startup entrepreneurs to bootstrap their startup concept, relying on personal savings with a traditionally high probability that the concept won’t succeed.
Whilst more than 90 percent of all startups fail within their first year of launch, it’s not impossible to self-fund a successful startup — GitHub, eBay, and Facebook are all high-profile self-funded startups that launched on the back of the personal capital of their respective founders. Successfully self-funding a startup means performing extensive market research and focusing on cost minimisation throughout the scaling process.
How can you self-fund your startup in the modern business climate, though? We’ll proceed to take a look at the reasons why you might want to self-fund your startup idea and break down the most important practices when launching your startup independently.
Five Reasons to Self-Fund Your Startup
- Launching a self-funded startup is a complex and often patience-testing process. If you have a startup idea that you’re considering launching, there are five major benefits that self-funding delivers:
- Early-stage business models change regularly
Remaining flexible is critical to the success of any early-stage startup. Launching a startup independently allows startups to remain agile and alter their business model in response to market conditions. The evolution of a startup often involves significant changes to logistics and business models, which can cause friction with VC investors. Self-funding provides founders with the ability to act decisively.
- Self-funding allows startups to minimize risk
Investing personal capital into a startup places startup founders in a position where they are responsible for operational costs, maintenance, stock, staffing, and many other factors. Inviting VC or angel investors into early-stage funding means fully investing your time into the success of your startup. Self-funding your startup, however, provides you with the ability to ensure your startup concept is viable and capable of generating income through incremental scaling before fully committing or quitting your day job.
- Self-funding encourages incremental scaling practices
Launching a startup with external capital provides founders with the ability to scale rapidly — which is not always good for the long-term success of a business. Data available from Startup Genome reveals that 74 percent of unsuccessful startups fail to succeed due to premature scaling. Self-funded startup founders are more likely to carefully assess business decisions before committing to rapid scaling strategies.
- Self-funded startups minimize incidental spending
Funding your own startup means minimizing costs wherever possible. Self-funded startup founders are obligated to justify every business expense, from networking events to marketing campaigns and new hires. The tight operational budget available to self-funded startups establishes a clear path from launch to operational profitability.
- Self-funded startup founders retain control over their business
Seeking startup capital from external sources limits the amount of control startup founders have over their business. Launching a startup with traditional finance means startup founders must adjust business practices in order to satisfy creditors. Investors or partners must be satisfied with the progress or growth pattern of an externally funded startup. In some cases, startup founders may lose majority control of their startup due to early fundraising efforts. Self-funded startups provide founders with complete control over their startup over the long term.
Minimising Your Startup Costs - i.e. Bootstrapping
Launching a successful self-funded startup means drawing the maximum amount of value from existing or self-generated funds in order to grow a business from a conceptual stage to a profitable company without relying on investors or traditional finance solutions.
Self-funded startups operate with limited resources, which necessitates business practices that minimise expenses. A new startup has multiple needs and founders must take into account the expenses incurred by development, content writing, website and online presence development, graphic design, marketing, project management, accounting, staffing, and many other factors.
Retaining control over your startup by self-funding provides you with the opportunity to significantly reduce your startup costs by performing many of these critical tasks yourself or via lower cost methods.
Most startups utilise contractors in the beginning, with payment organised on a per project basis – this serves to limit your staffing costs to effectively just what you need rather than pay for expensive full-time staff overheads such as rent, superannuation and other employee entitlements. Before progressing down this path, it is important to ensure that an effective independent contractor relationship is established to ensure employee entitlements are not deemed necessary in the future.
Your skill in negotiating favourable rates with suppliers will also be a great asset.
Many suppliers will be happy to extend ‘startup rates’ in the hopes to secure an exciting new client who could turn successful in the future. “Never Split the Difference” by Chris Voss is a frequent resource used by founders to help hone their negotiation skills & reduce the actual outgoings.
Start with a Plan
Developing a detailed business plan is the most important element of launching a successful self-funded startup. Before launching your startup, the first step is ensuring that you have a sense-checked startup idea. Begin by identifying your target market, assessing your potential competitors, and determining the key factors that will make your startup stand out in a saturated marketplace.
- Your business plan should take the following factors into account:
- What are your objectives?
What problem does your startup solve, and what makes it different than your competitors? What do you plan to achieve with your startup, and what will you need to run it?
- Market analysis
It’s essential to ensure that there is a viable market that can support your startup. Perform market research to ensure that the capital you’re investing in your startup concept will help create a business with real customers.
- Perform a financial forecast
Self-funded startup founders must determine exactly how much capital they will need to launch their business and take it to a stage at which it begins to generate income.
- Understand your competition
A business plan should identify the other businesses that you will compete with in your target market and incorporate a detailed investigation of their competitive advantage and any barriers your startup may face when competing with them.
- Define your product or service offering
Before launching a self-funded startup it’s important to clearly define the products and services you will offer, how much they will cost, the benefits they deliver, how you will market them, and how or where your product or service will be produced.
- How will your startup be managed?
A successful business relies on a management and operational structure. Self-funded startup entrepreneurs may operate on a solo basis in early growth stages but are likely to require staff as their business scales. A business plan should take into account the logistics of how your startup will operate, who will perform which tasks, and the responsibility of management teams.
- How will you market your product or service?
Choosing a cost-effective marketing strategy for your startup is critical when minimizing startup costs. It’s important to evaluate your marketing budget, the marketing channels you will use to approach potential customers, and the frequency of your marketing efforts.
- How will your startup be structured?
The structure of your business has important implications for taxation and accounting. When setting up a new company, it’s best to engage the services of a finance professional in order to ensure your business is compliant and structured in a tax-effective manner.
Cut Hiring Costs with Freelancers
Hiring new staff is inevitable for any successful business. Early-stage self-funded startups, however, commonly lack the budget necessary to bring in new full-time staff. The rise of online freelancing platforms makes it possible to engage the services of professionals on an as-needed basis, eliminating the needs to hire dedicated staff members in the early stages of your startup launch.
If you’re launching a smartphone application, for example, you may choose to engage the services of a freelance developer on an as-needed basis while you develop your MVP. Similarly, web design and social media management can be contracted out to freelancers at a fraction of the cost of in-house staff.
Engaging the services of freelancers in the early stages of your self-funded startup launch also eliminates the need for office space. There are many remote work enabling apps such as Trello, Slack & Jamm that allow decentralised teams to work together across multiple time zones — eliminating the cost of office space rental can free up capital for more important profit generating activities.
Write Your Own Content
Social media plays a critical role in the growth of new businesses. Data published by Forbes reveals that 40 percent of consumers follow and engage with businesses via social media. Content is becoming increasingly important to the success of new startups — consumers demand in-depth information and guides from brands that support their vision and the products or services they offer.
Sharing information, tools, or news relevant to the consumers in your target market is a highly effective method of connecting with new customers. Hiring dedicated content creation staff can be expensive for self-funded startups, however. Writing your own content for your website, blog, or social media can significantly reduce your startup expenses and provide you with a highly cost-effective method of raising the visibility of your startup online.
Get Hands-On with Cold Calling or Emailing
Once you’ve launched your self-funded startup, you don’t need to wait for customers and clients to come to you. Approaching potential customers directly is a highly cost-effective strategy that available to any startup founder with access to a phone or email account.
Cold calling, for example, has a direct impact on the bottom line of a self-funded startup. Uber co-founder and CEO Travis Kalanick attributes the early success of the international ride-sharing platform to early cold calling efforts, beginning with just a spreadsheet of phone numbers for chauffeurs based in San Francisco.
Cloud-based telephony solutions such as VOIP allow startups to create dedicated inbound and outbound phone line for a fraction of the cost of traditional landline services. Enterprising self-funded startup founders are also able to multiply the effectiveness of cold calling practices by engaging the services of online freelancers who are able to perform cold calling tasks, freeing up critical time that can be spent on other important early-stage launch tasks.
Virtually, this can be achieved by reaching out to potential customers or partners via LinkedIn and building your personal brand online which is also an extra-ordinarily cost effective approach.
Go Manual Before Automating
The practice of launching “hollow MVPs” is a common technique used by self-funded startups to get their product off the ground and in the hands of customers without the need for expensive automated solutions at early launch stages.
The core concept that drives hollow MVP launches is providing customers with the impression that the core features of a product are being delivered without the need for extensive back-end development. Groupon, for example, launched with a simple WordPress website and created vouchers that were sent to customers manually — despite the fact that the platform appeared to be automated.
Launching a hollow MVP allows self-funded startups to begin marketing and selling their product or service while building more advanced web and mobile apps. The Doordash food delivery platform launched in a similar manner, taking customer orders via a simple webform and manually assigning pickups and deliveries to friends.
Use Low or No-Code App Development Platforms
App development can be prohibitively expensive to self-funded startups but building a mobile or web application as a new startup doesn’t have be performed in-house. No-code app development platforms such as GoodBarber, Appery.io, and Shoutem allow users to create both iOS and Android apps with no coding knowledge whatsoever — allowing your startup to provide customers with an app at launch to help evaluate the commerciality of your idea.
Launching your self-funded startup with a detailed plan, minimising costs via online freelancers, content, and app development, and proactively approaching potential customers will provide your business with a competitive edge and drive your startup to success.
Self-funding your startup concept can provide you with many advantages over external funding options. If you’re considering launching an independent startup, reach out to Fullstack today for comprehensive financial guidance.
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Stuart Reynolds is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech companies, agencies and entrepreneurs.