To Each Entrepreneur Their Own

Ruben Canlas of Dig It All Solutions posted in his own BGN Blog Post the following question:

“Hello, technopreneurs! I'd like to know how you funded your startups. Please share funding options and strategies that you took while building your tech companies (apart from pitching to VCs, of course). 

“I'm drafting a course on technopreneurship and would like to include practical tips from everyone who's been through this or is going through this. Your input will also be helpful to many of us starting up new ventures.”

All good startups and smart entrepreneurs like those who responded to Ruben’s blog post normally start with their own hard earned savings.  That is the start.  What happens after depends on the financial requirements of the new company and the ability of the business to provide for the cash flow needed by the company to achieve the goals planned by the founders. All these (cash requirements and profits) have to scale according to the objectives of the entrepreneurs. The answer to this question DEPENDS A LOT ON THE ULTIMATE GOALS OF THE FOUNDERS/ENTREPRENEURS.

I will try and share three example scenarios to illustrate my point. (a number of you readers here are experienced entrepreneurs, so I apologize if I sound polemic but I was hoping that my response might be useful to other would-be entrepreneurs.)

Scenario A:  The Aggressive Wanna-Be Silicon Valley Team -  which is a traditional path and  follows these sequence of events:

1) After the above mentioned boot-strapping, a prototype product or initial service is proven and customers are interested.  Follow-ons, beta products are done in relative small volumes and can be funded with existing boot-strap capital.

2) If the goal of the Entrepreneurial Founders’ Team is to grow fast and/or even to be large enough to go public within a certain number of years (many entrepreneurs wish this so they can cash in at least part of their equity), then the cash generated has to be healthy enough from good profit margins to allow the desired hockey-stick growth in revenue. Often, this phase is hard to bootstrap from existing profits.

Take the following concrete example: Imagine that  somehow the founders managed to bootstrap a software product company that generated PHP 5 million in profits in your first year from a very cool product.   Realistically, maybe that would be 20% net profit from PHP25 million in sales. Nice!

Imagine at that point that you want to grow suddenly very fast by increasing headcount by say 25 people.  Depending on how well you pay your staff, then 25 people in the Philippines can cost you FULLY LOADED (office rent, benefits, PCs/laptops) anywhere between 1 to 3 million per month in expenses! Not counting the initial investment of CASH plunked into office equipment and improvements, rent deposits etc. (only part of this CASH investment is expensed monthly as depreciation/amortization).  Clearly the profits are stretched to pay for that kind of growth.

And we are not yet including in my VERY ROUGH calculations the costs of selling and promoting a product that is targeted to sell in a hockey-stick fashion world-wide.

Therefore, in the above example new money has to come in.  Now, everyone in the BGN.org knows I am a VC working at NarraVC, but I will admit that venture capital is not for all; and moreover each VC firm  is different. So EACH case is unique. I have seen some companies who went to angel investors or to relatives.  The difference is that Angels and VC's normally have experience in start-ups in the field being entered into and may have useful contacts there as well. Other Angels and relatives might simply be wealthy people looking for bankable projects and might not have very much to share with the entrepreneur(s).

3) If this kind of hyper growth continues and the margins are normal, then more rounds are required from outside. At some point Angels and relatives can't bank-roll the growth requirements (think on the order of $5M-20M. Yes, there are angels and friends who can fund up to $5M!), so venture capital guys and private equity shops are probably the only choice at this stage.  (Private equity shops like the $20-100million sizes as their funds tend to be in the >$1billion range and they can't have too many deals.)

Scenario B:  The Web Service Geniuses - which can happen to a number of entrepreneurs in the Philippines (this can apply to those whose products have gross margins at >80% and whose overhead rate is somehow kept very, very low)

1)  Same as scenario A’s phase 1).  But we note that in this  scenario B that the capital REQUIRED to deliver the product could be less and gross profit margins can be higher. This is the case in software if  (as mentioned in other posts in the BGN.org) cloud infrastructure, open source software, and cheaper IT equipment prevalent today could be used. Growth could also be less expensive to fund.

Some other things that can help mitigate cash requirements:

1. NRE (consulting engineering projects) that might pay an advanced deposit as extra cash sources.
2. Or like Michael Hansson responded to Ruben: the customer pays in advance for product development.
3. The company creates a software product or service with sufficient free cash profits (>80% gross margins and low overhead) that can be plowed into the growth.

2)  Next event: the web service catches on like wildfire and profits are enough to pay for a few more genius engineers that can develop new products.  The product grows virally in cyberspace with minimal sales/advertising expense and the team of 30 engineers is acquired by a large Silicon Valley internet monster firm. Note however: the concrete example given in Scenario A  above was for a realistic software company in the Philippines and it did state that to grow to the number of people needed to create an interesting internet service would likely require tens of millions of pesos, so these geniuses need to plan accordingly and execute to perfection.  The founders must have enough profits or NRE to support this scenario B or be patient enough to wait until initial profits are sufficient to pay for the R&D effort to get one there.

Scenario C: The Patient Entrepreneur  - which can happen to a number of entrepreneurs in the Philippines who don’t feel any need to be public, to liquidate or simply don’t want to have to report to anyone but themselves (or at least maybe only to their spouses J )

1)      Same as scenario B’s phase 1) including note on better profits and less capital required.

2)      But, now this entrepreneur couldn’t care less about how long it takes to grow as long as he gets enough profits to fund his lifestyle. So, this person will only invest in growth as sufficient funds come in. There won’t be anyone else invited to the party and he will work hard and doggedly to make the company a success. An exit or IPO will come if and  when it comes but it could take 10-20 years or never at all.  He will likely decide that he continues to not want to report to anyone, much less the public. There are many millionaires in the Philippines like this either selling coffee, sago, books, furniture, jewelry, etc. They are the bulk of our entrepreneurial community and they are awesome as well!

Therefore, in the end,  it really depends on what the entrepreneurs/founders desire in terms of: pace of growth, eventual size of the business, strategy for financial exits , level of head-ache/stress and responsibility.

Each case is different and the entrepreneurs have to decide for themselves what they truly want to achieve.

I hope this is helpful and not too boring.

Cheers,

-Paco

PS. For the successful entrepreneurs of the Scenario C mold, it is unclear what will happen to the business when they die.  Likely it will be passed on the kids if they want it. If no one wants it, then bankers will sell it in toto to new investors.

PPS. Friends: KINDLY FILL IN YOUR PROFILE ESPECIALLY YOUR PRESENT JOB AND YOUR BUSINESS AREAS OF EXPERTISE, because lately BGN has been asked for referrals for top executive positions (we placed a Chief Architect in one of the biggest telcos) or for Balik-Scientists. Other big companies simply ask us whom they could consult with regarding specific business needs. We are sure there are so many experts among you so PLEASE, PLEASE fill in your BIO Profile so we can connect you to groups that need your brains.

And don't worry too much about your birthdates or your salary levels. Those are not too important, optional and all this is kept private and never sold to any services. THANKS!