Rich Emrich successfully avoided selling any equity in his EQ-assessment company, Altus Assessments Inc., for seven years.
Instead, the Toronto-based company took advantage of a range of government grant programs, took on debt financing and secured loans. In that time, it grew from a single client – McMaster University’s faculty of health and sciences – to becoming the go-to applicant screening software for 90 per cent of all American medical programs, as well as many other professional faculties on both sides of the Canada-U.S. border.
Mr. Emrich, the chief executive officer who founded the company in 2015, suggests avoiding venture capital in the early years, if possible. That way you have “flexibility to pivot your company and really establish what’s working before you try to scale it,” he says.
After bootstrapping its way to becoming a market leader, Altus Assessments took on its first outside investors in August to fund an acquisition. The strategy worked well for the company, but Mr. Emrich acknowledges that many startups wouldn’t be able to achieve that level of growth without investment capital.
“Our funding strategy isn’t the strategy for everybody,” he says. “It’s a choice that needs to be made given the unique circumstances of your company.”
In most cases, entrepreneurs are encouraged to avoid selling equity in their company as long as possible, but that advice changes depending on the unique makeup of the business, the product and the market in which they operate.
Getting the timing right, however, can be a matter of life or death for a startup.
“If you’re too early – and you don’t quite understand your business model or your marketing engine, and maybe you haven’t figured out if it’s a niche play or not – you can raise money, take in capital, give away a chunk of your company and then waste the capital trying to get growth,” says Nazim Ahmed, the founder and CEO of Creative Layer, an Ottawa-based personalized print-on-demand platform.
Still, Mr. Ahmed, a serial entrepreneur who recently secured $3-million in funding for Creative Layer, says taking on investment too early and subsequently not seeing significant growth can spell disaster for founders.
“You’re putting your own position at risk because the board will wonder if this is the right CEO for the company,” he says. “At that point, you start losing confidence from your employees, your investors, even in yourself, and it’s very difficult at that point to raise another round of capital.”
Waiting too long to raise capital, however, comes with its own risks. Mr. Ahmed says companies that have successfully bootstrapped their way to a certain degree of success often resist seeking outside investment, even after a well-funded competitor enters the market.
“At that point, the other player could be burning cash over several years, but they’re winning market share, and they’re making the environment more and more difficult for you to operate in,” he says. “Then you’re in a really bad position because nobody wants to purchase a dying company; the best time to sell your business is when you’re going in a growth trajectory.”
Mr. Ahmed, who founded and sold two companies – DNA11 and Canvaspop – before founding Creative Layer, says three important factors can help entrepreneurs determine the best time to take on investors.
“No. 1, as an entrepreneur, you feel like you need some outside expertise at the table, so a formal board. No. 2, you start seeing your competitors moving at a more rapid rate and start leaving you behind, which could be an indication that you’re stunting your own growth. And No. 3, when you can see an exit in your future, if you’re mentally ready for that, then I think it’s time to take in capital,” he says.
Despite the importance of getting the timing right, however, there is no one-size-fits-all solution for seeking outside financing. Those considering VC funding should first ensure they have established a product-market fit, strong business fundamentals, a clear reason for seeking investment, a willingness to work with a board of directors and an exit strategy within a reasonable time horizon.
“Sometimes timing is affected by technology; sometimes timing is affected by a goliath competitor, or a new entrant coming in and displacing you. There are all kinds of things that impact timing,” says Lance Laking, managing director of the MaRS Investment Accelerator Fund.
“When you dive into the details and you start looking at specifics, sometimes there’s a clear justification to either remain bootstrapped or to take that external financing and take advantage of the leverage that brings; the devil is in the details.”
Regardless of how the company is funded, Mr. Laking emphasizes the importance of using that capital strategically.
“Capital efficiency is always a good thing to have, whether you’re a bootstrapped, thinly capitalized venture, or you’ve taken external capital and you have a strong balance sheet,” he says. “You should always use that capital war chest as best you can.”