The first real business I started was a Web development company when I was 16. I can remember agonizing over whether we needed to purchase our first Web servers. In total, the cost—while it seemed prohibitive and hard to justify—probably only added up to a few thousand dollars. We made the plunge and never looked back.
One of the most incredible trends of the last few decades has been the decreasing cost to start a business. This is particularly true of technology businesses, but I think it applies in many other industries as well.
Changing Times
Want to author a book? A few years ago, you would need to commit to a very significant minimum print run. Today, you can jump on Amazon and sell even just a single copy on demand.
Want to run a tech startup? A few years ago, you would need to set up a data centre or at least lease space and purchase some expensive computer hardware. Today, well you can also jump on Amazon and spin up a server for a couple of dollars.
And while it’s true that the cost to start a business is reducing, there is still a need to understand how to finance new operations. Expensive upfront capital expenditures might now be less of an issue but hiring staff and building a team still costs money.
Money Matters
My favourite source of money is to raise from customers. Revenue from customers doesn’t cost any equity and, in addition to the money, you gain incredible insight into your product or service.
When we started GO1 we grew the business to a few hundred thousand dollars in revenue from customers before we raised any external money. Before we even had a product we would pitch our idea in the form of a PowerPoint deck to see whether it resonated with our target audience enough for them to sign a contract.
When it comes to raising external money, most people consider venture capital or angel investors. But I think it’s also incredibly important to consider whether there are any government grants that might be relevant. We were selling our product internationally from the first day, but only realized later that the Export Marketing Development Grant offered in Australia might apply to what we were doing.
The final area we’ve had experience in has been working with investors. Our first investor was Y Combinator, which was also the first investor in Dropbox, Airbnb and Stripe, alongside many other well-known startups.
Not Rocket Science
I often get asked questions about raising money from investors, and like most things in business, it’s not rocket science. To my mind, there are a few steps that help to qualify whether your business is a fit for venture capital.
Understand your Space
The first step is understanding your space well. It sounds basic (and it is), but if you want to raise investment then you need to have a solid understanding of what you’re doing, and why you’re doing it. And try to second guess your thinking—test your assumptions, don’t just assume blindly.
Understand your Business Model
The second step is to understand your business model and how it aligns with potential partners. For some businesses, a social impact investor might be a better fit than a venture capital investor. It’s important to understand that venture returns and investments often follow a power law distribution and how that impacts the fit between business models and investors.
Have a Strong Product, Team and Traction
Finally, you need to have a solid product, a strong team, and ideally good traction. It’s easy to rattle off these points in a sentence, but often much harder to build in reality.
If you meet the conditions above, you need to consider what you are looking for in a potential partner. Is it only access to capital or something more? You also need to understand the people involved: are you and your potential investor a good fit, and will you be able to work together for the many years ahead?
This is the approach that worked best for us at GO1. There are many other sources of capital out there too. For some businesses, crowdfunding might make sense. There has also been a rush of startups looking to raise money through blockchain offerings.
While it’s easier than ever to start a company today, it’s also a steep learning curve when you first begin. But every experience can be a learning opportunity, and even the setbacks can ultimately make you stronger; overnight successes like Airbnb took years of hard work and lessons earned through many mistakes along the way. So do your research, know your business, persevere and rise to the challenge.
Andrew Barnes is the co-founder and CEO of GO1.com, a Y Combinator alumni and one of the world’s largest onboarding, compliance, and professional development platforms. He is a Rhodes Scholar, has a Masters in Science and Education from Oxford University, and a PhD in Business Strategy from Queensland University.
This article was first published by Entrepreneur.com