Does Your Startup Really Need a Venture Capitalist?
Grow Your Business, Not Your Inbox
The startup world is often abuzz with funding announcements. Startups that secure a big round of funding seem to have made it. In Southeast Asia’s Internet economy, more than US$37 billion of venture capital has flowed in over the last four years.
It seems that there is an excess of funds up for grabs, resulting in startups prioritizing the ability to secure funding rounds over the ability to be sustainable and profitable. The alarming recent news of WeWork and Honestbee are reminders to the world of venture capitalists (VC) that sustainability and profitability are more important factors that fast growth.
We run eezee.sg, an online marketplace for businesses to trade. We just secured a funding round from our investors, Insignia ventures.
When our start-up achieved a cash flow positive status over a year ago, we thought long and hard about our next phase of growth.
We asked ourselves, “Do we want to grow the company at a slow and steady pace by bootstrapping or should we double down on our traction and offerings to achieve maximum impact and market share with venture capital?”
We could either continue to grow at a slow yet steady pace or strive towards securing VC funding. We chose the latter. We had a viable business model and we knew our business could help close a gap in the industry. We were aware that funding will be able to propel us to the next stage. Although this was our decision, we feel that not all startups need to raise money. We were very certain that it was not the end of the road for us if we did not raise money at a comfortable equity stake. We were not desperate for an injection of funds.
If we did not raise money, we may be growing at a slower pace. But, we would still be funneling profits from the business back to grow the business.
Refining Business Model VS Raising VC funds
We found out from founders who have successfully raised venture funding too early on—once they get funded, their focus turns to be answerable to investors, rather than refining their business model.
First up, your business goals may not align with the VC so you will have to be clear about your VC investor’s goals before you take their money. VCs are looking for their return on investment (ROI). If there is no common ground between your goals and the VC’s goals, there may be misalignment. Even if you have common goals, if you are not focused enough, there is still a high chance of going off track.
When you keep fueling unsustainable growth without a sustainable business model, then even if you get more funding, you will be burning more money if you do not take stock of the current business model.
Here’s a few questions startups can ask themselves before getting funded:
Do you have traction or data to prove your business hypotheses? Can you justify your product market-fit?
Well, without real customers, product or data, anything on your business plan are merely assumptions. For startups, there is no baseline of suggested real customer/revenue that startups should have to help them decide if they have achieved product-market fit and are ready to look for investors. Different businesses have different metrics that are fundamental to their business. For example: If you are a social media app business, you will measure your daily active uses and engagement.
Do the founders understand the key factors that drives the company’s growth?
There are a combination of key factors for us. Our founding team had a strong vision, market and domain knowledge when it comes to running the business, procurement and finance matters. We are also equipped with being able to build our tech and UX/UI internally.
Market timing can also make or break a start-up. You may have a great product and a strong team, but if the market is not ready for your product, it simply would not take off.
In Singapore, it is a good time for e-commerce now with digital transformation being a strong theme for small and medium-sized enterprises (SMEs) in recent years.
Our business relies heavily on PunchOut Catalogue which means that businesses can simply punch out and punch back in to make purchases. They no longer even have to leave their procurement software.
PunchOut existed in the late 90s, back then it was called Catalog Interchange Format (CIF). While the telecommunications infrastructure was laid down, it didn't thrive back then as the idea of using the internet as a medium of transactional exchange was still new. There just wasn't enough people online to create a marketplace.
Fast forward to today where the internet is no longer new and Saas systems are becoming more popular. We are in a time of significant transformation where organisations are preparing for Industry 4.0. Today, smart machines are connected to a network and these machines can communicate with each other to generate big data that can impact business.
If we had started the business 10 years ago, we probably would not be seeing the traction and growth that we are getting today. The market then was simply not ready to accept this level of innovation.
A good example of how timing can make or break a start-up is Grab. If Google maps did not exist to lay the foundation for digital maps for future innovation. There will not be ride-hailing like Grab as we know today. Could Grab thrive 7-10 years ago? Maybe not.
It is important for start-ups to be aware of the key factors that drive a company’s growth from having a strong founding team to the readiness of the market in accepting your solution.
Doing things that don’t scale but addresses fundamental problems
In the early days of Airbnb, the founding team realized that they were not getting much traction in New York and this was a result of lacklustre photography of apartment listings in the city.
The team then bought a professional camera, went door-to-door and started taking photographs of as many New York listings as possible.
By the end of the month, Airbnb’s revenue in New York had doubled.
Airbnb’s Rebecca Rosenfelt claims that sometimes it’s beneficial to do things that don’t scale, because an unscalable tactic might be more scalable than initially thought.
For us at Eezee.sg, this means interacting with our clients and suppliers one-to-one in the maintenance, repair and operations industry.
We got down and dirty. When we first started, my Co-Founder and I took trains and buses to our supplier’s office to pick up a water pump and deliver it personally to our client.
One of the things our founding team agreed on was to learn to be the employee so as to have a deep understanding of the business.
We took turns working in the different departments so we know what really happens on the ground and who we were working with. It made us understand the issues suppliers may face when it comes to logistics, order fulfilment and how we can improve operations.
We learnt that the senior suppliers needed guidance for their product listings. They needed help to write proper product descriptions and product features. They also needed to take better product photographs to better attract buyers. Product listings were bad because they lacked information and did not help the customer (or give them confidence) to make a purchase decision.
Speaking with our large enterprise clients and understanding their pain points allowed us to build better custom modules to meet their organizational needs when it comes to procurement. This allowed us to expand our horizons and accelerate our learning process in building enterprise solutions.
We took about a year in our startup journey to test and validate our business hypotheses, to better understand the multipliers that were driving growth and speak to our partners to build a closer product-market fit.
Once we determined that our Northstar metric was Gross Marginal Value, we questioned everything that we do afterwards and whether it would add value to it. For example, the number of suppliers, product listings and customers were important because they helped drive this metric.
Being on the ground allowed the co-founders to have a clearer picture about where ezee.sg stood in the market. With this understanding, our business purpose and direction became much clearer that we needed funds to scale what we want to do when we get funding.
Be purposeful about the use of funds
We feel that startups should not raise money just because the money is out there for grabs.
The startup community in Singapore is quite closely knitted and news spreads fast. We have heard stories from some founders who needed to raise funds because they were running out of runway.
This is a problem that occurs with funding unsustainable growth. A problem that surfaced in Honestbee.
Internal numbers for Honestbee in December 2018 showed that it lost nearly $6.5 million.
Honestbee had reached $12.5 million in Gross Marginal Value in December 2018. But, this was brought down by discounts and online marketing spend to bring in new customers. A former employee mentioned the “outrageous” use of coupons to hit short-term revenue goals.
During the early stages at eezee, we were raising funds for the sake of raising but we did not know how to make use of the money. We started talking to the enterprises that approached us and asked them what they needed to do their jobs better.
We derived that they required an enterprise system to enable them to connect their software to ours via our PunchOut catalog. Once we were on this, we doubled down on building the technology so the funding will help us scale towards acquiring more enterprises for our business.
We were careful to stay relevant in the ever-evolving tech space and we were very aware of which players were in our space when it comes to work tools.
Recently, Singapore’s DIY chain Home-Fix were shutting down their its brick-and-mortar stores due to high retail costs, stiff competition and a lack of DIY interest among Singaporeans. It is crucial for businesses to find a good product-market fit and understand what their customers really want.
During our startup journey, we met a lot of people along the way who supported us and provided guidance to Eezee and helped us. We have been very fortunate to be guided by the best in the business who were willing to link us up in spaces that we were learning about.
The Value of Bootstrapping
Before rushing to get funds, start-ups should not undermine the value of bootstrapping when it comes to building the business. Bootstrapping forces founders to be disciplined and resourceful. We learnt to growth-hack, using the least amount of resources to gain maximum growth.
One of our growth hacking strategies was to build our customer base.
Instead of engaging digital marketing agencies for paid advertising, it forced us to pick up digital marketing ourselves to gain traction and bring in revenue.
We learnt the ropes on running revenue generating to awareness campaigns. We learnt a lot during our bootstrapping phase where we had the space to experiment and learn with our own money and at our own pace. We did loads of testing on what works and doesn’t for our audience when it comes to content and product marketing.
This entire experience gave us a lot of insights into how to drive greater growth for our business with limited resources.