Why I Will Not Take Outside Funding for My Businesses

Jaime Morales
Oct 4, 2019 · 5 min read
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Henri-Edmond Cross - Valley with Fir

In 2012 I had the privilege of being hired on as a software engineer for a company some friends of mine had started. There were 7 of us. I was one of 2 engineers, along with one of my buddies.

It was great. We were building a product in the music industry, and were super excited about the opportunity. I even took a pay cut to be involved.

But this would end up being a quick lesson on what not to do in business. I lasted there for a year and then moved on. I could see there was no future in the business and went on to take a much higher paying corporate job (Which had its own issues. More on that in a later post).

In that year I ended up learning a lot about what I did not want to do when I started my own business. I understand not everyone will go the same path, but I believe strongly in the following lesson.

Outside funding

Most businesses in tech these days start off with a big idea that gets pitched around to either professional investors or venture capitalists. If the business is able to get funding, they go out and hire some people, rent an office, buy equipment and get to work. Sounds great, huh? But there are two major pitfalls with this.

The first pitfall is that you stop owning the decisions of your company. When someone else has put the bulk of the money into your business, they tend to be able to dictate how you should run it. This happened to us right away. We started out as a business in a very niche market, the dance/DJ community. This meant there were not a ton of users, but those that were there were passionate and dedicated. But the main investor thought that we needed to hit more people, so he pushed us to pivot and go for the larger music and video space. We went from a product that had the potential to satisfy the needs of a very passionate community to a product that had to compete with at least 10 other products out there just like it and had no passionate users. Users came and went because there was nothing that spoke to them.

The second pitfall is that when you have other people handing you money, you start to think in terms of how you are going to get the next round of funding instead of how you are going to make revenue. I remember having discussions with our CEO about what the plan was to start making revenue (we offered our product for free to users), and his response was always “Oh, we are not worried about that now. That will come later.” I get that there is a time and a place to think about revenue, but we are in business to make money. If your business does not even have a plan on how it will eventually make revenue, it is not a business, it is a hobby. And in the end, that is what it felt like to work there. It was a hobby for the founder and he liked being in charge and making decisions, but I don’t think he wanted to think about making it a real revenue-generating business.

Bootstrapping

There’s no two ways about it. Bootstrapping a company is hard. And you will need at least some amount of startup capital to get it going, but the benefits far outweigh the risk. The main benefit is one of mindset. You are dead focused on making that first dollar, since you don’t have anyone out there that can bail you out. This leads to creating a revenue stream first, and then building a business around it. This is the opposite of what passes for common knowledge these days, by the way. Following this approach will lead to you trying out different ideas, testing them out in the wild, and seeing what sticks. Once the market has revealed to you want they want, through trading actual dollars for your products and services, this is when you can start to build out the business.

One could spend a ton of time writing a business plan, getting some money together to pay their initial employees and get an office, and launch their business, only to see that the market was not interested in their product. This is what happens to most startups. And the sad part is that, with substantial VC funding, this can take years to play out. Imagine spending a decade or more waiting for that big win, and eventually closing your doors when you finally run out of money and run out of investors that are willing to bet on your vision. This happens all the time. I have worked at these companies. The startup I mentioned earlier lasted four years, without any semblance of being a real business. Imagine the number of different ideas that could have been tested out during that time in order to find the ones with the most revenue potential and investing your time in only those that proved themselves out. What would that look like four years down the road?

Wrap up

Now, I am not saying that no business should ever take outside funding. Most of the game changing businesses out there took on outside funding. These were businesses with huge ideas that needed huge teams to implement their visions. But what you don’t always hear about are the thousands of other startups with equally huge ideas that went nowhere.

In the end it comes down to risk. Do you believe so strongly in your idea that you are going to take that huge risk and devote a good chunk of your life to see that your vision is achieved? Are you willing to be singularly obsessed with this idea, to the exclusion of everything else, for years on end? Sorry, but most people just do not have this kind of vision or drive, myself included. Instead, I choose to take smaller, calculated risks, and constantly test them out. Some may work, some may not, but I can take the small wins, and turn them into medium wins, and turn those into big wins. Then rinse and repeat!

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