If you could create your own fantasy Board of Directors, who would be on it? CO— connects you with thought leaders from across the business spectrum and asks them to help solve your biggest business challenges. In this edition, a CO— reader asked whether bootstrapping, or investor funding, is the right path to raise capital.
George Deeb, founder and managing partner of Red Rocket Ventures, answers...
Entrepreneurs struggling with whether to bootstrap the business by tapping their own personal resources — or raise capital from investors — need look no further than their own long-term goals.
“If you are looking to maintain 100% ownership of a smaller, lifestyle business, I would not raise any capital from investors,” Deeb said. “Do everything you can to bootstrap finance the business.”
Should the long-term goals be considerably different, with aspirations to build a $1 billion company, for example, then Deeb recommends raising capital from investors because the infusion of funds permits a company to move and grow faster than the bootstrapping route.
Each strategy has its own pros, cons, payoffs and pitfalls and Deeb has had a front-row seat at numerous deals, mergers and acquisitions. After a career in investment banking at Credit Suisse First Boston, he founded Red Rocket Ventures, where he’s consulted with more than 700 startups. Deeb is a managing member for the FireStarter Fund, an early stage VC in the digital technology space and he became co-CEO of Restaurant Furniture Plus last year following Red Rocket’s acquisition of the B2B company.
A chief reason Deeb encourages bootstrapping for entrepreneurs who intend to maintain ownership is to avoid the ticking time clock that starts when investors provide capital. Within five to seven years of funding a company, investors expect to collect a return on investment and that could involve sale of the company.
You have to be passionate about what you are building.
George Deeb, founder and managing partner of Red Rocket Ventures
Prepare
There are several steps to take when preparing to ask for business funding — regardless of whether you're bootstrapping, searching for investors or requesting a loan. Make sure your business is ready.
“Entrepreneurs know what they are signing up for before they even start,” he told CO—. Bootstrapping is not easy but ensures control of business decisions without interference from outsiders. Once the commitment to bootstrap is made, “Stay persistent,” Deeb said.
“Don’t let a snag in the road derail your whole idea,” he added. “What typically drives persistence is the second most important point, passion. You have to be passionate about what you are building. If you believe it is important, ‘next-generational,’ has a long-term future solving major pain points, then that combination of passion and persistence is a good recipe to get through tough times of bootstrapping.”
Deeb has authored several books on entrepreneurship and explores bootstrapping methods such as hitting up family members for capital, crowdfunding, small business loans and startup marketplaces here.
Entrepreneurs going the investor route to raise capital need:
- Proof of concept that demonstrates market traction with revenues or user base. The product or service must be built — not merely conceptualized. “I’ve had many entrepreneurs say to me, ‘I have this great idea and I need money to help launch this idea.’ No money ever shows up for that,” Deeb said.
- Elevator pitch: “You need a short, sweet, two-sentence version of the story, something exciting enough to get someone’s attention to even focus on the pitch,” he said.
- Funding pitch: Clear, succinct proposal backed by solid metrics. “Gone are the days of 50-page business plans,” Deeb told CO—. “Investors don’t have the time, energy or appetite to read that. What they care about is a 10-slide PowerPoint that very cleanly lays out the story: What is the business? What pain point is it solving? What is your go-to-market strategy? What is the financial model? And most importantly: What does this mean to me as an investor? If I give you a million dollars today, how much can I expect to get out in five to seven years?”
Must-have metrics for the funding pitch include revenue, growth rate and unit economics, Deeb said. Revenues validate proof of concept and growth rate shows how fast the business is growing month over month.
Unit economics provide the granular details investors need in order to assess an opportunity. Deeb suggested metrics that cover average order size, gross profit on an order, marketing cost per order, return on ad spend, customer acquisition cost and whether these activities are profitable or unprofitable.
Funding pitches with metrics showing market traction inspire confidence, Deeb said, so investors will conclude, “Oh, this works. For every dollar I put in, I will get $5 or $10 out and it should easily start to scale and generate cash flow.”
CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.
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