It seems like every other week a once-lauded “unicorn” level company is on the verge of collapsing (or already has). Nasty Gal and Bonobos are just a couple well-funded companies that have struggled to be profitable and have gone in the red. What do these once-promising companies have in common? They took on too much funding, too fast. (NY Times covered this problem quite well recently.)
I can tell you first hand when you’re starting a business all you hear about is how you need to get funding and scale up as quickly as possible. While this may be true in some cases, it’s not a turn-key solution to success. The irony is that startups are often validated by the amount of funding they receive while that same funding can ultimately cause the business to fail. The problem with taking on huge rounds of venture capital is that you’re now on their clock and under tremendous pressure to sink or swim in an artificially inflated situation.
Often companies (such as Nasty Gal) that were self-funded and wildly profitable before they took funding end up spending too much money too fast on things they don’t need, ultimately burning out and failing. That’s the problem with getting too much money. Initially, things may feel too comfortable; you may no longer feel the need to be as resourceful or think of creative ways to stay profitable. After receiving huge amounts of funding, businesses tend to go on spending sprees instead of staying lean. And this is a huge problem.
On the opposite end of the spectrum is Sara Blakely, founder of the billion-dollar Spanx empire. She is inspiring for many reasons and she’s the perfect example of how to build a billion-dollar business while staying self-funded. She started with $5,000, hit the pavement hard on selling to retailers, and til this day Blakely still owns 100% of her company. She generated her own funding through sales and put that right back into her business; a truly impressive feat and really (in my opinion) the best way to grow a business.
The moral of the story? Blakely’s game plan works and it resonates with my own philosophy, which is why I continuously advise aspiring entrepreneurs to self-fund and play the steady, long game. Unless you absolutely must take on a round of funding, bootstrap as long as you can. If you’re interested in launching a business, my best advice is to keep your overhead low, save up 6 months to a year of your own funds to get your idea off the ground and when you start to become profitable, stay lean and put the money right back into your business. Should you require a round of funding, only take as much as you absolutely need and spend as though you still have a lean budget.
For those of you wondering, yes, I practice what I preach: I self-funded STYLEFOX with my own savings and still retain 100% ownership of the business. I purposely avoided VC and funding from the beginning because I didn’t want to take on more than I needed and feel pressured to make decisions that might not be right for my business. I have since advised anyone who wants to start a business to do the same, if possible.
For more tips, check out my interview with MyWorth below where I discuss how I started and the importance of self-funding and reinvesting back into your business.