“How will I fund my next milestones?”
Many companies have a product roadmap, or a market roadmap, but few have thought through their capital roadmap. Most founders assume that their capital strategy will be just like any other startup company:
Use family & friends to set up the business and hire initial team members
Use angel financing to build a product and start acquiring customers
Use seed or VC financing to grow initial traction into scalable sales
Raise follow-on VC financing to scale the company
Get big enough to be acquired by a competitor
We call this approach “the capital conveyor belt”. This pathway works for some companies, but we too often see companies that are mindlessly riding the conveyor belt, without knowing if it’s getting them closer to building what they set out to build. Or, the company just isn’t a traditional high-growth company, and won’t be attractive to potential acquirers. Or, the company isn’t trying to use venture capital at all.
Maybe most commonly, we hear founders or others stuck somewhere between steps with no clear “funding stage” to get to their next milestone.
So what do founders do? Well, what they do best: they get creative.
Smash the Egg
Have you ever had one of these thoughts?
“I need a product to make money, but I need money to build a product”
“The investor said I need more traction for them to invest, but when I have that traction, I won’t need their money anymore”
“I can’t make progress without funding”
These are all versions of the “chicken-and-egg” problem. I can’t do X without Y, but I can’t do Y without X. How do you deal with this? As Cyriac Roeding says, “the number one job of the entrepreneur is to break the egg”.
These resourceful founders found creative ways to break the egg. Instead of throwing up their hands and letting their circumstance dictate what they could or could not accomplish, they found assets they could build and risks they could reduce that would make their company more valuable. As it turns out, making your company more valuable is a great way to attract investors.
Kailo Energy - A Case Study in Creative Financing
How do you raise money to go to market when you have no evidence that your go-to-market plan will work?
When we met Ryan, Dave, and Karl, the founders of Kailo Energy, they had raised a couple of small rounds of angel funding and built a beautiful, user-friendly residential energy product for powering all your home essentials if your power went out.
They wanted to raise $4M to build a sales and marketing team, launch nationwide advertising, and do the “big launch”. The only problem was they had been talking with investors, and investors wanted to wait until they had market traction. Rather than saying, “but we need funding to get traction!”, they went to work building assets they could build without money.
Karl went to work traveling to solar conferences, and discovered that solar installers loved their product so much, they wanted to buy it right from Karl and sell to their regional customers. Rather than saying, “but we need funding to make products we can sell!”, Ryan and Dave came up with a pre-sales program. Solar distributors could reserve the exclusive rights to a region if they promised to pay $25,000 when the products came out.
After traveling to 5 conferences over a year, they successfully signed up 30 distributors (instead of costing $4M, this plan costed ~$10k in conference fees). The best part was that the distributors hadn’t taken on any risk. They only had to pay if Kailo could deliver product.
With the asset of 30 contracts in hand worth $750k in potential sales, Kailo suddenly had a much different value proposition for investors. They also found that rather than needing to sell more equity in their company, they could use a PO financing partner to finance production of their product.
By the time they started producing product, they had generated another 40 commitments from distributors, and decided they could speak much more confidently about their go-to-market strategy. They starting meeting with and pitching VCs and larger energy companies. We weren’t surprised when 3 weeks into their raise, one of these energy companies offered to buy them for $20M.
In case you weren’t keeping track, here was Kailo Energy’s capital roadmap:
Angel funding to build a product
Pre-sales to de-risk the market and build a customer backlog
PO financing to fulfill on this backlog the products
If more founders shared how they traversed these gaps in the funding landscape, we think more founders would see they have many more options than the “capital conveyor belt” to fund and grow their business.
Investors come in many forms
Though it’s been 11 years since he wrote it, we think Paul Graham is right when he says, “The distribution of investors should mirror the distribution of startups” (see The Future of Startup Funding).
Yes, we all know about angel investors and VCs, and these types of investors serve a critical role in helping founders in certain situations. But consider that these are not your only source of investment. We’ve seen founders get critical investments of cash, credit, and other resources from:
Customers (Equity investors)
Your management team or advisers
Manufacturers / factories
There will always be a chicken-and-egg problem facing you in the next round of growth. How are you smashing the next egg?