While collecting the stories of more than 50 startups that got big before they raised venture capital, it was surprising to learn how many founders claimed to get their business off the ground with just $5,000-$10,000. In a world where companies that have raised more than $5M describe themselves as “seed stage,” a four-figure sum seems insufficient to start a billion-dollar business. But it’s not. So, how do you become humongous with humble financing? There are a few principles that seem common:
A characteristic of this kind of capital efficient business is figuring out how to get paid upfront and deliver services later. Tough Mudder and PaintNite are two event-based startups that sell tickets up front, and provide services, extreme obstacle courses and alcohol-fueled art classes, respectively, later. In a world where most startups have to wait at least 30 days for payment, these startups have a consistent, non-dilutive source of growth capital at their disposal.
This model allowed PaintNite to bootstrap to $25M in revenue on just $6,815 in seed capital and has accelerated to $65M in revenue following a round of funding. Tough Mudder hit the ground running with $10,000 and reportedly earned $100M in 2017.
In the SaaS world, the closest equivalent is pushing annual billing cycles which offer a similar benefit. In either case, a strong cash conversion cycle can be more important than venture capital.
ButcherBox founder Mike Salguero invested $10,000 in a Kickstarter campaign with the hopes of learning how to use the platform and earn $100,000. He ended up with $210,203. The sweat equity of his crowdfunding campaign provided 20X the working capital.
With cash in hand and tons of frozen beef in the freezer, he had to figure out how to move mutton shanks and filet mignon, en masse. Even with the windfall from his Kickstarter, Salguero could only spend so much on marketing and couldn’t swing a comprehensive CPM campaign.
Rather than sinking sums into dubious digital ads, he struck partnerships with prominent influencers and offered them an ongoing royalty structure that would pay out every month that a subscription stayed active. Moreover, in this model revenue comes in before marketing expenses go out, allowing Salguero to scale the business to its max potential. The result is an incentivized sales force that helps ButcherBox ship over a million dollars of meat per week!
The playbook for most VC-backed consumer products startups is largely the same. Come up with a new twist on an old product category, hire a branding firm to bling it out, raise VC, and use the cash to flood Facebook and podcasts with advertisements.
RXBar, recently acquired by Kellogg’s for $600,000,000, focused on sales first and “branding” second. The distinctive, no BS packaging that put the ingredients front and center didn’t appear until the founders had been selling delicious bars in dreary packaging for two years. In fact, it was the process of selling, and repeatedly using the ingredients list as the sales pitch, which led the founders to the realization that the Spartan ingredient list should drive the brand!
Reid Hoffman’s line that “If you’re not embarrassed by your first product you’ve waited too long to launch” is a truism in startup circles, but often not well-heeded by well-heeled startups.
The three previous examples aren’t the only examples of empty-pocketed entrepreneurs. The founders of Tuft & Needle stitched together just $6,000 to pursue their dream of a better box spring. Sara Blakely of Spanx fame only had $5,000 to launch her Lycra empire. These founding stories no doubt fail to paint the full picture, and the details of how they solved their working capital problems as they scale get less attention, but the companies are worthy of study.
It’s funny that the startups most likely to boast most about their humble origins actually had physical constraints — be they paint supplies or printed packaging — but the same principle applies in software. MailChimp funded product development using consulting revenues. Jon Oringer of Shutterstock built the prototype of his website and stocked it with photos from his own amateur collection. Thrillist showed that you could build a hundred-million dollar business by simply sending emails.
It’s easy to get seduced by the idea of raising ten or even a hundred million dollars, but it’s important to remember that these companies have created a couple of billion dollars in value with combined seed funding of less than $50,000.
What would you build with $10,000?