Raising my startup's first $1 million (or $867,000 to be exact) was like a dream come true. It took a year and a half of hard work to convince 34 angel investors—to whom I will always be grateful—to give me enough money to make my company a reality.
When my cofounder (my dad) and I set out to build a financial technology marketplace for receivables-backed commercial loans, we knew it was going to take a lot of time, money, and legal advice. Many investors pulled out early because there were too many moving parts to our model. We needed a credit team, a software development team, a marketing team, a sales team, and an operations team. Bootstrapping didn't look like much of an option at the time, so we raised that capital pre-revenue, pre-product, pre-everything, really.
And then we spent it—all before we had a single customer. Here's what we learned from the experience.
At the time we closed our first round of funding, all we had was a beta platform, a plan, and some really cool T-shirts that said, "I’d like to fund your brains out."
The moment when you look in your bank account and see hundreds of thousands of dollars that you are in control of is a moment you never really forget. You can’t help but think about how you haven’t been paid in years, how maxed out your credit cards are, and how the hard part is over.
All those blog posts you read, warning you that raising money is just the beginning, become a distant memory as you write that first check. And the second check. And the next thing you know, you’re burning through $100,000 a month without even trying.
We hired an accounts receivable clerk six months before we bought our first invoice. We hired an account executive to start selling our product before we even knew what we were selling. We hired developers without clear requirements. We started building out all this infrastructure to manage the client accounts we were sure would come eventually. But they didn’t.
As our bank balance got lower and our personal credit card balances got higher, waking up in the middle of the night in a cold sweat became the norm. That salary I'd been so happy to finally pay myself quickly vanished. We had tough discussions about what it would look like to close up shop. We had arguments in the office and fights in the boardroom with investors who weren't happy about our burn rate. We felt our company slipping through our fingers only five months after raising the round.
The good news is that we learned fast and started cutting back early enough to give ourselves more time to fix the problem. We took away every luxury and focused on the core of what we needed to do, which was to figure out our target market and start selling.
I’ll never forget one of my investors saying to me, "So your big plan is to work hard and sell stuff?" And my answer was: Yes. That was exactly the plan.
We started hustling—harder but also differently than before. We took advantage of all the promotion available to us and every free event and opportunity to pitch that we came across. We started reaching out to every company we felt was in our wheelhouse in a few key industries in our home state. We took a gamble on a vertical we wouldn't have previously considered due to what we thought were lower average margins than our model could handle.
We talked to anyone and everyone about the challenges growing businesses face because of a lack of access to working capital. We asked for feedback. We listened. We started having great conversations about our market and target customers and what it was that we were actually out to disrupt.
And then our first deal signed, followed quickly by our second deal. And third. And fourth—and so on. Pretty soon we were a real company, with real revenue, real paying customers, and real operational problems we needed to solve.
After blowing through money the way we had been, inking that first deal gave us a sense of relief we had never previously experienced. We took a little time to celebrate (cheaply, with a few rounds of local drinks), then poured all our resources back into building the right infrastructure. We hired people only as our tiny team maxed out on serving our new customers and developed technology to meet demand on our investment platform.
It’s amazing what you can do early on with just a few resources; in fact, I processed our first thousand invoices myself. In retrospect, it wasn't that we'd tried to run before we could walk. It was that we should have been running all along. And that isn't the same as spending.
If I had to do it all over again, I'd follow these three rules:
1. Make a budget and stick to it. I‘ve heard countless firsthand stories of entrepreneurs "spending money to make money." Stop—breathe—and get to revenue. Spend money once you start making money.
2. Think long and hard about your target customer. It was only once we started getting out and talking to people that we figured out where the specific gap in the market was. That sounds obvious now, but it can be a hard thing to actually do in the early phases. If I’d spent slightly less time trying to find investors and slightly more time looking for customers, we would've been in a much better place. You need to be able to clearly articulate the big problem you're solving, which your future customers won't be able to live without once you've got them.
3. Don't build on spec. Any bootstrapping entrepreneur will think this is pure common sense, but those of us who choose to start out with funding pre-revenue want to hire people and build infrastructure to prepare for that day when the floodgates open and customers come streaming in. That day is a lot further away than you think. The expertise I gained by talking to all our first customers and processing their loan transactions day in and day out was invaluable to me, and I know I’m a better CEO today having done that.
My story so far has a happy ending. Things are going well, and although I still wake up in a cold sweat more often than I prefer, it’s not because we’re on the verge of failure; success breeds its own special kind of panic. Still, I'll never forget the mistakes we made early on. That first round of funding we raised gave us the runway to make those mistakes, but if we hadn’t had the cash on hand, maybe we would've done things differently.
G. Krista Morgan is cofounder and CEO of P2Binvestor, a Denver-based marketplace lender that provides growing B2B businesses with asset-based working capital funded by a crowd of investors. She is a member of the Young Entrepreneur Council (YEC), an invite-only organization comprised of the world's most promising young entrepreneurs. Follow her on Twitter at @krismtl.