How do I get funding if I never plan to “exit”?

[angeleyescj]

Hi everyone, I’ve been working alone on a hardware prototype for 18 months. It’s come pretty far, but it’s still more like a working proof of concept than a beautiful, near final prototype. I’m at a point where I am my own bottleneck and need to multiply.

The problem is, I am fearful of VC funding because:

A) I don’t know what the benefit would be for the investor if I don’t plan to exit.

B) I worry that VC funding would send my project down the path of prioritizing an exit strategy or IPO rather than building a great product that is going to delight customers.

I have long term plans for this and want to build out my vision, and therefore want to maintain control.

My initial goal was to crowdfund this, but I’m realizing

A) Crowdfunding as a platform for “funding your dreams” is pretty much a lie. Your product needs to already be done before you can crowdfund: Manufacturing ready, MSRP priced out. If you underestimate the lead time, cost, or manufacturability, you’ll get killed.

B) I still have so much work to do. I can spend months more on my own to get to a prettier looking and better working prototype, but I’ll inevitably need a hardware and software engineer because I’m not good enough to do it all myself.

I’ve got $100k in the bank. One option I’m considering is, since I can’t afford to hire full time, maybe I can outsource specific jobs for a flat fee on various freelance or job sites.

Am I unnecessarily fearful of VC funding? Are there other options I should consider?

Any advice is greatly appreciated!

 

[fl269fl269]

@angeleyescj Get a SBA bank loan if you’re in the USA. Otherwise, look at other loan options for startups.

I’d personally take a loan before any investor money so I can continue to run my business free and clear of outside opinions and pressures.

 

[hollyoyo]

@fl269fl269 It goes both ways. The only way to go bankrupt is to take on debt. You can't go bankrupt if you only sell equity.

 

[wolfeagleking]

@fl269fl269

I don’t know what the benefit would be for the investor if I don’t plan to exit.

That. A loan might be what you are after - that said the bank probably ALSO wants a path towards getting their money back.

 

[moses199]

@wolfeagleking A profitable company has a very clear path to paying back its loans. Depending on the structure of the loan, getting paid back slowly is exactly what they want. The bank makes less money if the company is acquired and the loan paid off early.

And not just banks. There are plenty of investors interested in loaning out money and then getting a check every quarter. Just not traditional VC.

 

[krista123]

@moses199 Not at typical vc failure rates though, which this idea definitely has.

 

[angeleyescj]

@krista123 Thank you! I’ll look into types of loans you all suggested. The risk with the loan is, despite me having done a lot of research in customer needs and product requirements, I haven’t sold it. So ruining my life with debt if I fail is certainly a concern

But I see it’s a valid point, and perhaps the lesson is there’s no perfect solution. But I appreciate the ideas!

On the one hand, I could take debt and maximize risk and maximize control. On the other hand, I could significantly reduce risk with an investor but risk control of where this business is headed.

I really don’t mind sharing profits. I don’t believe I’m greedy. I just don’t want to commit to selling out.

At this point, as I’m trying to go from prototype 1 to a clean prototype 2, what I need is really engineering time/labor, as the spend on physical materials and prototyping is manageable. I’m wondering if an Engineer would be willing to work based on a promise of equity rather an investor… and the point again would be to receive a portion of the profits, not an exit strategy.

Perhaps that would be enough for me to get to a crowdfunding ready position, and if it succeeds, we’d then be able to afford a SW engineer to and UI designer to finish the actual software.

 

[trinitas1198]

@angeleyescj If all you need is labor, finding a co-founder or 'early employee' who will work for equity is not outside the realm of possibility, especially if a lot of what you need is on the software side. You will just need to present a compelling enough upside. You say you've done market research to validate your concept is viable. Package it up in a way that makes someone agree that there is a lot of potential upside in it for them.

Have you done any TAM analysis / market sizing / segmenting of the market? This is a core component of convincing anyone that your idea is viable, VC or otherwise.

 

[angeleyescj]

@trinitas1198 Thank you! I did enough research in terms of TAM to give me the decision to move forward, but I could probably only 60-80% of the amount of info I’d think would be needed for a business plan/pitch deck, for example. But I can certainly put it together.

Coming up with a compelling upside is something I’ll need some guidance on, but I’m sure I can do some research. Incentive stock options etc are also things I’m looking into, but again the upside only hits when there is an exit or IPO… and I’m sure someone putting in all that time and effort would like to see compensation come sooner. But I’m sure if I find someone who believes in the idea.. maybe a promise for distribution and/or equity, agreed upon salary to be paid when product launches, and perhaps some other bonus or incentive to help mitigate the lack of pay during the first 6-12 months prior to launch….? Just thinking out loud.

 

[trinitas1198]

@angeleyescj An early employee would probably get ISOs. A 'late co-founder' would probably get stock (it still might vest on a schedule or in chunks as a set of milestones being achieved).

The early co-founder route has
-tax upside for your co-founder (83b election)
-control downside for you (stock has voting power, but as long as you own at least 51+%, you are in complete control)
-you'll need a founder agreement instead of a stick option plan (probably a cheaper / simpler document than an option plan, but might depend on how templatized solutions around that are)

So the best incentive is probably an early co-founder role that grants your co-founder < 50% of the company stock

This is not financial advice and I am not a professional, do your research to confirm.

Good luck!

 

[angeleyescj]

@trinitas1198 Thank you! Very helpful to give me a foundation on which to research further.

 

[seeking_new_church]

@angeleyescj If you don’t make it attractive to investors you won’t get investors. There’s no magic path.

 

[soikeoworldcupxemkeo]

@seeking_new_church It is hard to go down the path of prioritizing a great customer experience over an exit and attract outside capital.

My experience is that 10% of people who want to prioritize customer experience are Steve Jobs types and 90% are just bad business owners.

It is a noble idea, but can go wrong.

 

[murri]

@soikeoworldcupxemkeo These aren't really goals at odds with one another. Having great CX doesn't prevent an exit. It only would do so if the company is focusing on CX to the point where its causing fundamental business problems.

 

[angeleyescj]

@murri Thank you everyone! Like @murri said - I don’t the customer experience and exit strategy are at odds. If you delight customers, that’s how you’ll gain business and be able to succeed and grow, which is in line with a successful business strategy for investors.

However, particularly on this subreddit but even in many other stories that have been shared in articles, investing news media,etc.. once you’re married to an investor, the priorities for how you think about growth dramatically change.

And so if I do need the money, and like @bk20257 and @soikeoworldcupxemkeo indicated, I still need to have an attractive offering for investors…
Is there reasonably another option besides an exit strategy?
Or is that really the only end game?

 

[murri]

@angeleyescj If you take funds from a VC, you're generally on one of three paths:

1. fail
2. sell
3. IPO

There are a few other possible paths, but they're more rare, you can't count on them that much. If you don't want to sell or IPO, you should find other forms of investment, loans, or revenue based financing.

 

[seeking_new_church]

@angeleyescj There’s lots of paths. Do it all yourself, It’ll just take longer. Or give equity to the other people that you need, just let them know the plan is to be a small business and they will share in the profit as you start selling them. Or max out credit cards, house loans, etc - depends how much you believe in what you are building.

 

[hadasah]

@angeleyescj Most companies can’t raise money.

What I mean is, most companies aren’t investable.

Yours in its present state is not. At least not by a VC. You’re in the market for angel investing or friends and family money.

Why do I say that?

1. You aren’t live.
2. You have no customers.
3. It’s just you.

This is how an investor would look at you. They’ve seen plenty of situations like yours. They want nothing to do with you right now.

So, whether you want VC or not is kind of irrelevant at this point, they don’t want you.

As for angels, they’ll probably have reservations for the same reason.

If you want money, your best bet is probably a friends and family round.

 

[angeleyescj]

@hadasah Thank you! That’s very helpful and allows me to put things in perspective: If I need funding, it’s probably not coming from a VC regardless. So if I’m going the angels/family/friends route, I would need to figure out what sort of compensation would be appropriate for them.

 

[caterine]

@angeleyescj Planning an exit strategy is just an acknowledgment that you understand the market conditions to sell. You don’t have to do it, but do you know what people in your market value?