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If you follow all the tech publications – TechCrunch particularly - every other day if not every hour, there’s new announcements on startups getting new funding from investors. It seems that these companies are unstoppable and on the path to greatness with their products and/or services. And investors are eagerly investing their money to provide the jet fuel to power these unicorns. 

To the uninitiated, it looks like starting companies this way – come up with an idea, prepare a pitch deck, get tons of money from investors, hire lots of people and Bingo!...you’re own your way to creating a trillion dollar company next month. 

Maybe that how it works on Mars, but back on earth, this is only one way of turning your dream into reality. There are a few paths to starting a company than meets the eye: 

1. Ol' Skool: use your own saving or borrow from others to open up (usually) brick-and-mortar businesses; 
2. OPM a.k.a. Other People’s Money: raise money from external investors, in exchange for a percentage of your company to turn your ideas into reality; 
3. Bootstrapping your way to greatness: spend the lowest amount of capital at the start to test your idea and reinvest the profits to gradually grow the business; or 
4. Buy existing companies: find a company with growth potential and pay for it using your own money, raise money from external investors, borrow money from banks or a combination of them. 

I have identified the four common ways to translate your idea (or dream) into reality. There might be other approaches that I might miss out. Do share your thoughts if know of any other ways to start a business. 

For this post, I will explain in slightly greater details the first two paths in the following paragraphs. I will then continue with the rest in the next post. 

On to the first two then. 

Ol' Skool 

Ol' Skool can be cool right? It depends.   

Usually when a coffee lover graduates from roasting their own coffee at home to ‘let’s open the next Starbucks’, s/he would scrape together monies in his/her savings accounts, or borrow from family, friends (or fools 😱). Then scout a store location, sign a lease, furnish the store, buy the equipment, sacks full of coffee beans and other raw materials. Perhaps within a few weeks or so, organize a Grand Opening day to announce to the world that the coffee shop is ready for business. 

The same principle may apply to other kind of brick & mortar businesses like hair salon, nail parlors, laundromat, beauty products, furniture or a pawn shop.  

There are numerous examples of companies that took this path successfully, such as Walmart, KFC, Ikea, Malaysia’s TopGlove, BlueBird, the taxi operator in Indonesia and Philippines’ Jollibee. 

While it is difficult not to fork out a chunk of money up front to develop your organic, gluten-free and no-petroleum-based-plastic shampoo, there are a few tactics you can try out: 

1. Pre-launch advertising: place a few ads on your social media (and/or the local newspapers) announcing the store/product/services you intend to offer. Share your contact info for interested people to reach out to you. If the responses are encouraging, you go ahead and get the venture off-the ground. 
2. Launch temporary mobile kiosks or food truck: this is especially helpful if you plan to eventually open up a café and/or restaurant. Rent a kiosks or food truck and test out limited menu and capture the feedback from (paid) customers. Based on the feedback, you can tweak the menu/prices/locations before you (commit your life) settle down on that prime real estate. 
3. Rent a ghost kitchen: Just like the (Amazon Web Services) cloud is a boon to software developers; ghost kitchen could be the answer for aspiring restaurateurs. Similar to #2 above, you can rent a ghost kitchen that comes with all the kitchen equipment for you to test out customers’ feedback on your masterpieces. The main difference is that there is no physical location for you to test the menu against a crowd. You take and fulfil orders instead through food delivery apps. 

Back to the question...Ol' Skool is cool right? With a little tweak to the traditional approaches, you can minimize the risk and increase the likelihood of success for your business idea. And make Ol' Skool cool again. 

OPM a.k.a. Other People’s Money 

This approach will get your covered on TechCrunch...for 23 minutes until another startup announces a much bigger fundraising round from ToughBank. 

So, there is a 21 and ½-year-old engineering prodigy that hacks together a better, faster and cheaper version of Tesla over a weekend. S/he is so convinced that his/her creation will democratize electric car ownership across the globe.  

Next steps. Put together a pitch deck and reach out to his/her cousin’s professor friend who knows a bunch of angel investors. Schedule a Clubhouse session to pitch all of them at once, rather than back-to-back Zoom calls. S/he is in hurry to get this to market before the dude at Nikola figure out the secret sauce.   

At the end, all the investors agree to invest US$50mn in the venture. Off to the races to find a co-working space, buy the latest Apple machines with M1 chips and hire a bunch of smart engineers to produce a working prototype.   

The prototype shows promise. The driver can say “Hey Car, lower the window and order a Samurai burger meal for when we reach the nearest McDonald’s drive through.” 

Now the company needs to raise more money to produce the first 50,000 cars. Schedule another Clubhouse session with existing and new investors. Kaa-ching! Got another US$500mn in the bank to build a giga factory. 

Six months later, the founder organizes another Clubhouse session. This time to raise a modest US$200mn extension round to build a dealer and charging stations. No sweat. Money in the bank in no time. The company was featured on TechCrunch for its latest Series B2 funding. 

On to the next Clubhouse session to build the service/repair network, secure the rare-earth to make batteries and buy TikTok ads. All told, the company sold 20,000 cars after raising US$10bn over 13 funding rounds, valued at US$800bn (78x sales multiple). All the while operating with negative cash flow from operations. 

I know, I know...the story is a bit of an exaggeration (is it really 🤔), but it captures the gist of starting and growing a company through raising OPM. This is the genesis of the Venture Capital (VC) industry. Startup raises money from VCs. VCs in return has to raise a large pool of money from other investors called Limited Partners (LPs) before it can invest into a portfolio of startups. 

This whole approach to starting a company is generally suited for ideas that take a long gestation time which required patient investors. Fusion (perpetual) energy, quantum computing and biotech come to mind, for example. 

Separately, VCs tend to fund startups with disruptive ideas and/or business models to challenge the incumbents. The theory goes that these startups will exhibit high growth rates, while operating at a loss in the early days in order to capture a sizeable market size. Afterwards, it will be able to charge high prices on its way to profitability (or not). 

Some of today’s iconic companies were born under this framework. Apple, Amazon, Google, Oracle, Intel and Netflix are the disruptive companies in their respective industries, all funded by VCs before their eventual IPOs. 

It is definitely possible to build your next startups using this approach. Just be mindful that the more money your raise from outside investors a) the more ownership you need to give up and b) the more pressure for you to meet their (financial return) expectation. Also, be mindful of the deal terms while you negotiate the investments. Hire a good lawyer to advise you on the terms to avoid any seller’s remorse. 0.5% ownership deviation might make or break your goal of becoming Forbes’ Top 10 richest tech founders. 

There you have it. We are halfway through in going through the different approaches to starting your dream businesses. Hopefully, this will give you some insights on the most common ways, in my opinion, when aspiring entrepreneurs think of getting their ideas off the ground. 

We shall explore the other methods in the post. In the meantime, stay tune and stay safe.

Be great,

Reez Nordin

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