Iam often asked for advice about the right way to fund a new technology venture. The answer is that there is no “right” way; just know that it will be the hardest thing you do as an entrepreneur. Given that in the current economy it’s harder than ever to raise money in Canada, when you start a business you have to ask, Do I need to raise any money at all? Can I avoid it?
Let’s say that you want to scratch the entrepreneurial itch and don’t have enough of your own money to start your company, or, like many entrepreneurs, you are in a big hurry to get to the top of the proverbial mountain. In either case, you need other people’s money (OPM for short). The fact is that most entrepreneurs, especially in technology, are in a big, big hurry. Market windows close quickly. Innovation makes applications obsolete. Big, hairy competitors can out-hustle a company with fewer resources. All of these factors usually force startups to seek equity investment through angels, junior public companies or venture capital firms.
Even in today’s tough economic climate, there is capital out there looking for good investments, and more and more local technology companies seem to be going the angel route; angels have available capital and are even self-organizing into small angel teams. The downside to OPM is that you have a bunch of stakeholders to please and the really big decisions need consensus among the various groups.
The best advice I can give the startup entrepreneur is to not take any money at all. If you can avoid taking OPM, you can set your own terms of growth, reinvestment and exit – and the world will be your oyster. Spend your own dough to get started and then bootstrap like crazy to make ends meet until your service or product is paying for itself in sales and gross margin.
There are a few local success stories that have followed this very model. Class Software Solutions Ltd.’s Ralph Turfus started out in the computer services business. His startup costs were minimal because he resold equipment and added value in setting it up for customers. Eventually, the cash flow allowed him to invest in software applications where he saw a gap in the market. Class made a very successful management system for local government recreation programs. By 2004, when he sold to Active Software Inc. for a reported $20 million, the company had shed its service past and focused solely on software licensing and support throughout North America. Turfus did it his way – on his terms.
ACL Services Ltd. started as a hobby of a business professor at UBC. He was an academic with a focus on forensic accounting and audit regulations. His analytics software could check on the complex accounting within large organizations and make sure it was above board. With his own money, he finished the product and made a few sales to corporations that he knew well. Eventually, he formed a company, and on cash flow alone it grew to the point where it is now used in 95 of the Fortune 100 companies, employs more than 200 people and has revenue in the tens of millions. His son went from the initial salesperson to CEO. Harald Will still runs ACL today and his family owns most of the company. They decide what to do with the cash flow. They decide when to exit.
Many technology companies emerge from other businesses, having used their own resources to get through the startup phase; others start with capital from the founders and require no OPM. There is a downside to this approach: it almost always takes a long time. Turfus ran his business for 20 years. The Wills have been at it for 22 years. If you want to avoid OPM, don’t be in a big hurry. Bootstrapping and growing from internally generated cash flow takes patience.
Brent Holliday heads the technology practice for Capital West Partners, a Vancouver-based investment bank.