Venture capitalist Richard Harroch notes that “it’s almost always harder to raise capital than you thought it would be, and it always takes longer. So plan for that.”
Most entrepreneurs focus on their big idea or on putting together the ideal business plan to grow their company, without putting enough focus on the funding.
Unfortunately, the approach you take to raising startup capital can have a massive impact on the success of your digital venture and on the control you have over it. Working with outside funding like a venture capitalist usually means giving up an equity stake and potentially taking on new partners that will be involved in the operations and direction of the business.
Beyond the concerns over business control, outside funding can also come with a ticking clock. Investors will want to see a return on a certain timetable and will expect you to hit specific growth metrics. Incubators and accelerators also encourage startups to race toward specific goals—as the name implies. This can put pressure on your venture and force you to readjust your business plan to become profitable more quickly.
Rather than developing a strong business model and then deciding how to fund it, there are ways to build a business plan that naturally makes it easier to raise capital. The strategy I’ve used over the last decade has allowed me to bootstrap 14 digital ventures while maintaining full control over the company and keeping a steady revenue stream to support our ventures. Here’s how you can do it, too.
Benefits Of The Venture Studio Model
Instead of starting with an initial business idea, my partner and I built a digital agency. This allowed us to create a revenue stream from client work while also building out our development teams and perfecting our processes. Most importantly, we gained invaluable experience working with businesses to solve their pain points and identify opportunities in a variety of industries.
One of the key parts of the venture studio model is the idea of utilization rates. Keeping a large enough team to handle sudden client demand means even the best digital agencies may have times where their engineers aren’t assigned to client work. So a utilization rate of 60% means that 40% of the time, you’re paying your engineers but you aren’t getting any revenue from it.
Now let’s go back to your big startup idea. Instead of eating the agency’s sunk costs, the venture studio model allows you to assign your development teams to work on your startup when they aren’t focusing on client work. This creates an extremely sustainable model where you’re ensuring the most efficient use of your development resources while using agency revenue to raise startup capital.
Choosing The Right Business Plan
Having your own source of startup capital gives you much more flexibility and control to develop your digital venture without needing to meet unrealistic growth metrics. However, your agency revenue isn’t limitless. This model doesn’t work if you’re trying to build a company that will require multiple rounds of funding and millions in capital before you start to see profits.
Simply put, if your business plan doesn’t expect your startup to turn a profit until you hit 1 million users, it isn’t right for this strategy.
Our own team uses a simple formula to validate startup ideas: Look for ventures that are worth an average customer price of at least $83.33 per month. This price point means that you only need 1,000 customers to hit $1 million in annual revenue.
Not only is this goal attainable, but 1,000 customers allows you to truly get to know each of them and constantly work to better achieve product-market fit. Since you aren’t worried about achieving mass scale, you can worry more about improving your product and better tailoring it to the needs of your specific, niche market. This can result in a better product, a more loyal customer base and a stronger foundation for future growth—on your own schedule.
Continue With Venture Studio Model To Fund Businesses
If your end goal is to launch your specific business plan, you may be tempted to close up the venture studio once it has successfully helped you raise your seed funding. In fact, the agency isn’t just a way to gain initial startup capital and then switch over to your real business idea. The agency provides an ongoing source of capital so that you don’t need to rush to develop your startup or risk running out of runway.
The added benefit of making raising startup capital part of your business plan is that you have a continuous source of capital to fund future growth or to help overcome unforeseen development issues or cash flow problems. These are some of the things startups run into trouble with the most, and they can easily lead to searching for additional funding and giving away even more control.
Raising startup capital is a difficult and continuous challenge for any entrepreneur. Understand this challenge before you get started and find a way to work it into your business plan, and you’ll see much greater success.