How to Fund Your Early-Stage Startup
We launched the first program in our 2016 Entrepreneurial Education Series, “When to Raise Venture Capital or Bootstrap,” on March 3rd with our partner 1871.
The event brought together powerhouse entrepreneurs and investors Bill Pescatello (Partner, Lightbank), Pam Netzky (Co-Founder, SkinnyPop), Kristi Ross (Co-CEO & President, dough), Katlin Smith (Founder & CEO, Simple Mills), and Craig Vodnik (Co-Founder, cleverbridge) to share their experiences funding their businesses, whether through venture capital or bootstrapping with moderator Peter Wilkins (Managing Director, Hyde Park Angels).
If you missed the event or just want a quick recap, read on for highlights from the discussion and watch the full video recording.
Key Takeaways
Peter Wilkins kicked off the panel by clearly defining the differences between bootstrapping and venture capital. Specifically, when you bootstrap your business, you retain full equity and control, but you have to fund the business yourself, whether through sales or your own personal capital. When you raise venture capital, you give up a percentage of your equity, and you also give up control since your investors will ultimately take board seats.
While there were multiple perspectives on when to bootstrap versus take institutional capital, the panelists all agreed with Peter Wilkins when he emphasized, “It’s about growing your business and using capital to grow it better.” Whether that capital comes from sales, personal funds, or outside capital depends on the business you are trying to grow, and the type growth you are trying to achieve.
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The Case for Bootstrapping
For Pam Netzky, the growth she and her partner were trying to achieve when growing SkinnyPop didn’t require institutional capital. Even if it had, the cost of that capital felt too high when they were first launching. As Pam put it, “Our theory was that if we sold even one dollar of our company, we’d have to answer to somebody,” and that was not an attractive option. Instead, the SkinnyPop founders opted to borrow from their existing business, Wells Street Popcorn, and pursue an aggressive sales strategy that allowed them to pay themselves back in six to eight weeks.
Pam acknowledged their circumstances were unusual, especially in a capital-intensive space like consumer packaged goods, but hammered home that every decision they made came down to understanding their costs and margins, and never making deals that compromised their extremely disciplined approach to turning a profit on every sale. As a result, Pam and her co-founder were able to keep the business afloat without taking on capital, allowing them to retain full control over the company’s mission.
Craig Vodnik shared a similar perspective on cleverbridge. With his co-founders, who were trusted partners he had worked with before, Craig bootstrapped his global ecommerce platform to profitability in two years. Having a more mature founder base with the funds necessary to get the business off the ground proved instrumental, though like at SkinnyPop, sales also ended up being a key component for cleverbridge. Craig emphasized, “If we would not have had a sales person or the ability to sell, we would have had a problem,” and ultimately would not have been able to keep the company running without institutional capital.
In both Craig’s and Pam’s cases, having access to sales revenue and existing capital through past businesses and personal funds made bootstrapping possible, which helped them maintain control and ownership of their companies. Nevertheless, they had to make personal sacrifices — Pam and her co-founder didn’t take on employees until years into running their business, and Craig and his co-founders forfeited salaries for the first two years at cleverbridge.
The Case for Raising Venture Capital
While Katlin Smith ultimately took two rounds of venture capital to keep up with Simple Mills’ ever-accelerating growth trajectory, she was no stranger to bootstrapping. Originally, she bootstrapped the business with her own funds and planned to avoid taking outside capital as long as possible, with good reason. As Bill Pescatello of Lightbank pointed out, “Early capital is the most expensive capital you’re ever going to get [in terms of how much equity you give up in exchange for capital], so push it off as long as you can.”
However, Katlin’s gluten-free, ten-ingredient-or-less baking mixes were flying off the shelves, and without working capital, she could not avoid stock-outs or keep up with the consumer demand for her products. Venture capital was her best option to keep the momentum going. Her first two rounds afforded her the “working capital, people on our team, and marketing” Simple Mills needed to succeed in the market. Venture capital also provided her access to industry experts and seasoned entrepreneurs who could offer guidance into how to build her business better.
Kristi Ross of dough.com and tastytrade emphatically seconded this idea, stressing “Not only does raising capital add [financial] value… but [investors] are resources through their connections” and knowledge. In building the media company tastytrade and educational and trading platform dough.com, Kristi relied on her investors to help find the customers that would drive her company’s growth and success. Bill Pescatello added to Kristi’s point by explaining, “the value [VC’s] provide is their networks.” This idea was especially important because in Kristi’s case, speed to market was the main determinant in success for the business — without funding and a network of connections, it may never get to the accelerated growth it needed to be a strong, sustainable company.
Though the conversation was mostly focused on when to raise venture capital or bootstrap, the panelists did offer some key suggestions for raising capital. Kristi hit the point home that “if you can show you are really fulfilling a customer need, [that’s what you do] to raise capital.” Similarly, Bill tagged on that when you pitch your business, you need to be able to answer the question “how does this business work and can [you] scale it.”
Get more insights and context around funding your startup from our full live recording of “When to Raise Venture Capital or Bootstrap”.
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About Hyde Park Angels
Hyde Park Angels is transforming early-stage investing by taking a people first approach. The organization is the largest and most active angel group in the Midwest. With a membership of over 100 successful entrepreneurs, executives, and venture capitalists, the group provides critical strategic expertise to entrepreneurs and the entrepreneurial community. Nearly 40% of our members have founded a company, 88% are CEO’s, top executives or corporate board members, and 100% invest in startups. By leveraging the members’ deep and broad knowledge of multiple industries and financial capital, Hyde Park Angels has driven multiple exits and invested millions of dollars in over 40 portfolio companies that have created over hundreds of jobs in the Midwest since 2006.
About the Author
Alida Miranda-Wolff
Alida Miranda-Wolff heads up communications and strategy at Hyde Park Angels, crafting and disseminating the organization’s brand in all forms across all channels. In addition to single-handedly building HPA’s integrated communications plan and executing its core elements, Alida manages membership, partnerships, portfolio company support, and all community engagement.
Prior to joining Hyde Park Angels, Alida served in a variety of journalism, marketing, communications, and management roles, specializing in creating spreadable multimedia content for tech-enabled businesses at all stages. Alida has run several Kickstarter campaigns, including one of the most successful in Chicago history, and still mentors companies running their own campaigns.
Alida graduated Phi Beta Kappa from the University of Chicago in 2014 with multiple honors and awards. She remains active in the university of alumni network, serving on five advisory boards and committees. Alida is also a published author and poet, with two poetry chapbooks currently in print, Domestic Scenes and Tree Fingers.
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