Like many people who become entrepreneurs, Matthew Slutsky did it because he had a great idea and craved the independence of running his own business.
But instead of relying on outside investment to support and build his real estate listing website, BuzzBuzzHome, Mr. Slutsky and his co-founder Cliff Peskin chose to fund it themselves.
In an effort to avoid taking angel or venture capital (VC) funding, Mr. Slutsky and Mr. Peskin pooled their life savings, took a little money from family and friends, and didn’t draw a salary for the first two years after the business launched in 2009.
“We really believed that if we took funding too early we’d be selling ourselves short,” said Mr. Slutsky.
He and his co-founder are among a group of entrepreneurs that have opted to ‘bootstrap’ their business, as it’s known in the startup world, which means to grow the business without external help.
Some entrepreneurs resist outside investment because of the strings that can be attached, including a seat on the board, a say in how the business operates and a stake of the company.
Startups are often worth less in the early stages. Entrepreneurs with a solid business plan often attract angel or VC interest because, like any savvy investor, they want to get in at the bottom and watch their money grow exponentially.
For some businesses it may make perfect sense to take outside money, or they have no choice if they can’t shore up the funds themselves.
Mr. Slutsky said he and his partner believed they had the expertise – and could scratch together enough savings – to build BuzzBuzzHome on their own.
“We didn’t want to give away too much of the company,” says Mr. Slutsky. “We knew that every day we didn’t accept funding our valuation was going up and that if we could hold on a bit longer we’d be able to actually get more.”
Today, BuzzBuzzHome is a thriving business that catalogues all new residential developments in North America. It has about 40 employees handling listings across the continent, and has offices in Toronto, Vancouver and New York.
It’s only now that Mr. Slutsky says the company is starting to consider outside funding to help accelerate the company’s growth across Canada and internationally.
There are pros and cons to taking angel or VC funding as a startup.
The advantages are the immediate cash injection and the expertise you might get from outside investors. The disadvantages can be the time it can takes to find and select investors and then handing over a stake in the business and potentially some of the control over how it’s run, says Keith Spencer, a Vancouver-based lawyer at Fasken Martineau who specializes in working with startups.
He says managing investor expectations can also be a challenge when dealing with angel and VC investors, as well as friends and family.
“If things don’t go well and you lose money that belongs to your friends and family – it can be devastating for some people,” says Mr. Spencer, who has had clients go through it. “You have to face these people around the dinner table at Thanksgiving or [other] holidays.”
When it comes to managing expectations, outside investors might be better in some instances, he says. “Angels have a much higher tolerance. They realize it’s risk capital if it gets lost.”
When deciding whether to take outside money, Mr. Spencer recommends his clients consider how much funding they can raise on their own, and their longer-term capital needs.
If the business won’t be making money for a couple of years, he says the startup may have no choice but to seek outside funding, depending on capital required.
Yoav Schwartz, founder and chief executive of content marketing software company Uberflip, started off without about eight angel investors. He bought out most of them about a year and a half ago after the company changed its focus from a publishing tool to its current business model.
“It was messy. There were small ownerships and of course they wanted big voices,” he said. “One thing we’ve recognized is that it’s not just about money, it’s about who you’re getting into bed with.”
Today, the company relies on investment from one remaining angel investor, which he says is hands off, as well as friends and family, government grants such as Industrial Research Assistance Program (IRAP),The Scientific Research and Experimental Development (SR&ED) Program and its own business revenues.
Mr. Schwartz recommends startups go it alone as long as possible, at least until they know they have a product that will generate revenue.
“Don’t just assume that if you have enough money behind you that you can build up enough users and it will just somehow create revenue,” he says.
Steve Hnatiuk, managing partner and co-founder at Lighthouse Equity Partners in Vancouver, says VC investors typically invest in one out of every 100 companies that they see.
“That is relatively stage-agnostic,” he says. “Professional investors are highly selective and only back companies of extraordinary potential. There are many other companies that have good business prospects that just do not meet the growth and market penetration expectations typical of a venture backed company.”
Mr. Hnatiuk, a former director and vice president with the Canada’s Venture Capital & Private Equity Association (CVCA), says research has shown that VC-backed companies achieve “much more significant economic impact by many measures.”
For the startup company, it’s about when to tap that investment and from whom.
“It’s important to recognize these are people who you’re going to be working with,” says Uberflip’s Mr. Schwartz. “Are they actually going to add value beyond the cheque?”