Dear Founder: Go Fund Yourself!


For decades, the largest companies in the world have been obsessing over their cash flows, trying to analyze every minute detail to become more efficient, better free cash flowing machines! The more cash you generate, the more cash at your disposal to self-fund your initiatives.

This is such an important area in the world of finance that there are institutions that exist to help you manage your cash, and help you out in times of need - banks!

However, cashflow management is completely unheard of in early-stage startups. All the chatter is just around venture capital and equity infusion. And they bring with themselves the beast of dilution, valuation, investor consent, and whatnot. Almost nobody pays attention to the importance of working capital management, some companies do not even have the hang of working capital on a monthly basis.

What the hell is working capital?

While working capital seems like a complicated term, it is simply the amount of capital you need to run your business on a daily basis! It is the combination of these things:

1. The cash you get in bank by selling your product/service

2. The cash that goes out of your bank in order to exits (rent, salaries, purchases)

3. The cash that sits in your warehouse as finished product i.e. inventory

It is essentially a cycle that goes like this:

Buy raw material > convert to finished product (i.e. inventory) > sell the product > collect funds from sale > use the funds to pay bills > make a profit > buy more raw material > repeat

Did you notice that venture capital does not feature in the above?

So when do you require venture capital?

Venture capital is only required if you have operations that can fill the gaps in the above cycle.

What are these situations?

  • High upfront costs - Machinery, a tech team to build a product. These require initial investment where you do not have a choice but to raise capital
  • Negative unit economics - In the working capital cycle that we shared above, the sale proceeds do not make enough returns for you to cover the cost of goods or fixed expenses. And you're okay losing money per sale with a view of turning profitable at a later date

A lot of people scale in a lean manner, testing their hypothesis quickly with the hope to earn profits as soon as possible. And if you are one such founder building a sustainable venture, you need to stop wasting your time on venture capital, pitching, wooing investors, drawing valuations, and surrendering your rights to some random investor!

You need to focus on fixing your working capital cycle so that you do not have to rely on outside captial.

How can you go fund yourself?

Its simple, but may not be easy. If you remember the cycle that we shared above, there are three core activities of your business:

  1. Make payments
  2. Collect payments
  3. Manage inventory

While traditional businesses used to purchase a large amount of raw material to turn into a finished product that they sold, and then collect payments at a later date, it need not be the same way today!

With new-age digital products, and software this cycle can be turned around. How?

  • Collect cash upfront via Pre-sales: Pre-sell your product before launch so you can collect payments upfront by providing a small discount. You incentivize the customer to save if they buy ahead of time. This discount will be far less than the amount of equity you diluted or interest you paid if you'd taken a loan!
  • Delay payments as much as possible: This does not mean you not pay your workers or vendors. This means to use the liberty of paying as late as possible. For example, a founder we know used to max out his credit card every month to save working capital for his company, essentially turning an upfront payment into a 45 day credit. If you work with B2B vendors, negotiate if you can pay in 90 days instead of upfront, most will agree. Try to pay as late as possible.
  • Keep minimum inventory: The last thing you want while building your business is to have all your cash tied up into inventory. Try to keep your inventory as low as possible. Sure, buying in bulk is tempting because of the discounts, but are the discounts worth anything if you do not have the cash to turn the raw material into finished product, or pay salaries? If you are building software, its always a good thing to ship weekly, monthly updates rather than annual ones so that customers pay you on a regular basis rather than one time.

All of this will help you keep holding onto your cash a little longer. And as founders, we believe you know the importance of having cash is akin to oxygen.

If you get this right, you will not need outside capital and might just be able to go fund yourself!

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