The Entrepreneurial Journey: Getting Started.
Every new business begins with an idea formed in the mind of a founder, a seed that grows and takes shape as it’s shared with the people who will become co-founders. As an organic process, it can be unpredictable.
The four distinct paths are not created equal.
Many founders initially bootstrap their ideas, expending time, energy and hard work — not to mention money, whether their own, or that of friends and family. At some point, they realize they need more resources to continue growing, both human and financial. And while all money spends the same, it’s difficult to predict how different people may affect the outcome in different ways (whether good, or bad).
Few entrepreneurs realize that there are at least four distinctly different paths that they can take to acquire needed human and financial resources:
- Continue to bootstrap;
- Join an Incubator or Accelerator;
- Seek Venture Capital funding; or,
- Partner with an Actuator.
The decision is an important one, given that start-ups fail at an alarming rate. CB Insights looked at the reasons for failure of venture backed technology start-ups and found that a lack of product/market fit, and people issues, each accounted for nearly 45% of the reasons for failure. Lack of financing, on the other hand, accounted for less than 15%. No amount of financing or executive leadership talent can overcome a poorly designed product or lack of interest in the market. However, while access to adequate funding can be difficult, it pales in importance to having an aligned, collaborative leadership team that can execute with efficiency and effectiveness.
In this way, the four distinct paths are not created equal:
Continue to Bootstrap
AdvantagesFounders control their own equity.
DisadvantagesResources are scarce and restricted. Growth is restricted by founders splitting time between strategic and tactical work. Product, market, financing and people risks are generally high.
Join an Incubator or Accelerator
AdvantagesAdvisors and mentors save founders from poor decisions. Acceleration of product development and evaluation of market fit. Extends bootstrapping phase.
DisadvantagesTime-limited; one year or less. Reduces founders’ equity with only short-term value. Human resources are limited; advisors and mentors are not partners (who work within the company). Financial risk remains high, but doors to additional financing will be opened. Complexity and risk of acquiring talent and building a “real” business remain high.
Seek Venture Capital Funding
AdvantagesDirect investment from the VC. Many VCs are talented mentors and advisors with expertise in strategically building businesses. Due diligence process should reduce product and market fit risk. Advisory role can reduce alignment and execution risks to some extent.
DisadvantagesReduced founder equity (often considerable). Control leverage with founders, causing relationship imbalance, potentially resulting in misaligned goals and objectives. Getting VC funding requires time and expertise that distracts from running the business. VC involvement is limited in time and scope, and they remain outside the company with different financial timelines and goals that can conflict with those of the founders.
Partner with an Actuator
Actuators are a relatively new concept that serves as an alternative, different from bootstrapping, incubators, accelerators or VCs. Actuators bring the talent and processes needed to actualize the business. Actuators work inside the company, part-time and long-term, increasing or decreasing that involvement with the needs of the company as it grows. Actuators bring a team of both generalists and specialists to the company as specific needs arise. Actuators are partners in the business, standing alongside the founders. They take a combination of equity and compensation for their time and expertise, extend the bootstrapping period, and bring-in financing partners as needed. Finally, Actuators tend to have a 3-year to 5-year time horizon.
AdvantagesActuators bring experience and talent into the company; they are part of senior leadership, solving problems on a daily basis, mentoring and growing founders as leaders. They are aligned with the founders, without conflict. They bring financing as needed, and have a shorter time horizon than VC, pushing for early exit opportunities. Actuators work inside the company and put their time and compensation at risk, so their vetting process should increase confidence in business success. They bring in experienced talent reducing the people risk.
DisadvantagesActuators usually do not have the ability to bring-in the considerable funding required for “hypergrowth” companies. Actuators have a shorter time horizon and push for early exit opportunities. They bring-in investor partners as needed but may not be able to sufficiently de-risk capital needs.