

Ask HN: Should we seek funding? - adviceseeker

I co-founded a consulting company that is at a turning point. We're fairly successful and have just under $1mm in revenue a year, of which we could consider $200k profit.<p>We've been developing a product for the past 12-18 months that is finally ready to launch.  It is a SaaS product that will cost $50-75 per month.  The market we are in is very competitive, but also very fragmented.  I can honestly say that our product is great and it has been very well received while in beta.<p>This is a first company for the founders, so there there are no cash reserves beyond what the consulting company generates.  We suspect we could raise $250-500k from small investors should we really try.  We're bootstrappers by nature and would rather have our first business be a strong base hit than aim for the fences.<p>Should we accelerate the product with financing? Wait and do that later? Or continue on the 37Signals path?<p>To us, this is as much a life choice as it is a business one.
======
ScottWhigham
I think that you are perhaps you and your co-founder are the only ones who can
answer this question. I know that sounds trite but that's not what I mean it
to sound like. My point is this: no one knows better than you two what your
goals are with the company. You said, "We're bootstrappers by nature and would
rather have our first business be a strong base hit than aim for the fences."
I'll take you at your word that this is true.

So the question that you and your co-founder have to answer is whether or not
you want your personal finances to be at $25m, $50m or higher in 10 years? If
so, it's less likely that this will happen if you bootstrap rather than
raise/sell. And there is no right/correct answer - no one can tell you which
you should do, only what they might do in your situation or what they think
someone like you might do in that same situation.

There are other aspects to it as well but the key point is, in 5-10 years from
now, what will you want? Do you still want to be running the business or will
you want to have hit the "reset" button and have moved on to something else?
There's no crystal ball so you have to take the risks and rewards all into
account.

Good luck and congrats on getting to where you are!

------
brk
Well, you shouldn't rule out funding options.

It's up to you to do the math. If you stay on the bootstrap path, you own 100%
of the company, and have a slower development schedule.

If you take financing, you give up some ownership in exchange for
acceleration.

For most people looking at funding there is still a lot of "mystery". Can the
team build the product? If they build it, will the users come? And so on. This
leads to valuations that are highly speculative (lot's of risk involved), and
funding terms that reflect this.

For your case, much of the mystery has been removed. This also reduces the
possibilities of crazy-high valuations, but also gives you a lot more power in
the negotiations.

My guess would be you might not be the traditional VC big investment big
speculation kind of deal, but might look attractive to the lower-end of some
of the super-angel sized deals. If your math is good, you could represent a
good medium-risk investment.

If you really "only" need $500k and you've got $200K of profit, I would tend
to think you could investigate debt financing instead of equity financing.
Silicon Valley Bank might be one outfit worth talking to about this.

~~~
adviceseeker
If we took a smaller angel deal, to what extent would we likely be giving up
operational ownership in addition to fiscal ownership?

~~~
brk
There is no generic answer.

My quick thoughts (and I'm not trying to pass myself off as an expert here,
just have some basic experience).

Valuations for businesses at your stage seem to vary from 2-5x annual sales,
to 2-10x annual profits, depending on many many factors. But in either case
that seems to put you in the $2MM-$5MM valuation range. If you're looking for
a $200-$500K investment, you're looking at about a 10-20% equity stake. This
would be a non-majority stake, so you _should_ be able to structure this so
than an investor (or group of investors if you got 4 or 5 angels) didn't have
majority control... though in that case you'd probably have to pay attention
to number of board seats if you actually took multiple investors.

IMO, what you most likely need is an experienced (super)angel who can give you
solid advice about managing the growth of the company. This would probably
include introductions to finance people (eg: CFO/Controller types), cash
management strategies, biz dev/strategist folks and so on. Basically you'd
probably look for someone who brings a little money and a lot of connections
who is looking to provide solid business guidance.

~~~
adviceseeker
Awesome advice -- thanks!

Right now the product makes maybe $80k/yr. Not bad for something that hasn't
officially launched, but hardly our companies key revenue source. We naturally
would rather grow this than the consulting side of things.

I think what I am seeing in this thread is that it probably makes sense for us
to hold on investment until a bit after we've launched. We'll learn more about
what our growth bottlenecks are that way and what we really need.

It seems a bit premature at this point to take investment against our
consulting income if we can avoid it. My guess is that we could probably get
better terms if the product is doing well.

------
jaspalsawhney
Bootstrap your way to stardom. Its not like you won't survive if you do not
get funding.

~~~
adviceseeker
This is our instinct, but are we selling ourselves short? SaaS loves $$ to
grow fast.

~~~
jaspalsawhney
Another way to look the whole situation apart from bootstrapping gung-ho which
I suggested earlier will be to ask yourself the following 1\. Do you already
have customers who have shown intent on using the product? - if Yes then it
indicates that people are waiting for your product so there is a reason for
you to release soon. If No then find these potential customers

2\. If you already have a set of potential customers then reach out to them
and validate whether they need all the features which you are planning to
include in the first release? - If the features (the basic set) is less than
what you had understood then you need to check how much money you need to get
it out to the users. Again you are just validating your understanding and not
asking the users for what features they'll want.

3\. Do you have a kick ass team which anyone who you go for funding will ask
you for? - This as mentioned above matters to anyone whose going to give you
money

4\. Is there competition to your product? If yes then how do you stand up
against them?

Answers to these questions will indicate something and then on top of that you
should add you gut feel whether you are comfortable or not with taking outside
money.

Best of luck.

~~~
adviceseeker
1\. Yes. There is overlap with our consulting customers as well as a 'release
notification' email list of ~2k.

2\. Initial release is feature complete.

3\. Our team is awesome, but young/inexperience.

4\. Yes. I believe we stand up VERY well. Our only downside is that we're
new/unproven.

