5 startup funding tips to build a successful company

Ryan Holmes
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Ever heard of Quokka, the online sports company that in the late ‘90s bought each of its 284 employees a $675 Aeron chair? What about Flooz.com, the online payments startup that around the same time paid $8 million for a single ad campaign featuring Whoopi Goldberg?

Those names don’t ring a bell? No surprise—both companies went bankrupt, a victim of their own extravagant spending. As venture capital pours into tech at amounts not seen since those heady days, startups are again wrestling with questions about how much money to raise and what it should be used for.

Looking at my own company history, I can venture a few general suggestions. We’ve grown from 7 to over 700 employees in about 6 years and learned some lessons on funding along the way. Each startup’s circumstances are different, of course, but I think these ideas on when, why and how much to raise can be helpful to keep in mind:

Start lean. The great thing about working in the tech space is that it’s relatively easy and inexpensive to test-drive business ideas (See Eric Ries famous “lean startup” concept). Generally, you don’t need to invest a lot in infrastructure or capital costs to begin exploring a concept. They key is to get something out there, even if it’s not perfect, see what sticks among users and pivot accordingly. This is much easier to do when you’re still in the napkin-sketch phase, before boards, investors and tons of overhead come into the picture.

Back in 2008, for instance, we soft-launched Hootsuite with what was really a minimum viable product—a basic, rather hastily assembled app for managing multiple social media accounts. When thousands of people signed up in the first weeks, we decided to dedicate a team of engineers to build out the new tool. We tweaked it based on customer input and ran data tests to see which features were really in demand. Only then, when we knew we were actually onto something, did the question of outside funding enter the picture.

Raise based on context. Once you’ve got a product with potential, do you bootstrap or immediately look for financing? The answer depends largely on context. If you’re working on a stealth project, with few or no real competitors and/or the idea isn’t especially capital intensive, then it may make sense to bootstrap, in turn maximizing your own equity and avoiding outside interference. The job search site Indeed, for instance, was famously bootstrapped for years before ultimately being acquired for nearly $1 billion.

On the other hand, if your industry is poised for growth, the competition is threatening to outpace you or you urgently need capital to grow and stay in the game, then it’s time to look into financing options. This was the case with Hootsuite. After launching, we bootstrapped for a year, but the clock was ticking and we were moving in slow motion. Competing social media management products were hitting the market and Facebook and Twitter were going from dorm-room curiosities to mainstream tools. Meanwhile, it was becoming clear that scaling and monetizing our tool would be capital intensive. So in 2009, one year after launching, we secured a $1.9-million Series A round.

Stay capital efficient. Money, of courses, changes lots of things. What’s important, however, is making sure it doesn’t change everything. With that initial funding and subsequent rounds, we were able to hire the engineering team needed to develop a world-class product, acquire competitors, bring executive-level talent on board and lease office space to accommodate our growing team. Businesses were just beginning to look for enterprise-grade social media tools, and – thanks to the quick infusion of funds – we were able to be one of the first players in that space.

What we didn’t do, however, was change our underlying philosophy on spending. We were determined to remain capital efficient. So our new office space was anything but glamorous – filled with used furniture in aging warehouses on the wrong side of the tracks in Vancouver. We didn’t spend on gala launch parties and our salespeople traveled on the cheap. And, since traditional advertising is so costly, we continually pushed ourselves to find alternative ways to boost our product’s exposure. My favorite: A guerilla marketing ploy at SXSW back in 2012. We bought a used bus, pimped it out to look like our mascot (an owl) and – for less than the price of hosting an event at the conference – got exposure in USA Today and dozens of other papers.

Take equity off the table in later rounds. With early funding rounds, sometimes every cent is funnelled right back into the business. In subsequent, larger rounds, however, it’s necessary to reassess priorities, with an eye toward rewarding key contributors and creating a business built to last. Let me explain with an example.

When Hootsuite was able to secure its record $165 million raise in 2013, a portion of that went to what’s known as secondary financing. Essentially, our investors bought company stock back from the founders and early employees who worked so hard to build the business. For many of us, this was the first time we were able to see any substantial liquidity (read “cash”) from our time at Hootsuite. The impact – both psychologically and on a practical level – was huge.

We were able to buy homes in the community. We were able to ensure that existing needs for our families were attended to. We were actually able to enjoy the fruits of our labor. And this meant that, rather than just desperately racing towards the payday that comes with an IPO or exit, we could instead turn our attention to a longer-term vision – steadily building a multi-billion-dollar company.

Have a rainy day fund. One final factor to weigh when considering how much to raise, particularly in later rounds: the bigger the business, the more cash you need to have on hand. It’s essential to have a few months of payroll stockpiled, for instance: At large companies, that can represent a significant sum. More strategically, having a sizable war chest allows a company to ride out shifting trends and keep focused on the bigger prize. A business pouring all its energies into simply staying out of the red misses out on larger plays and opportunities down the road. Having a rainy day treasury allows a scaling company to remain focused on innovation and emerging trends, maintaining a startup spirit even though its youthful days may be behind.

This article is published in collaboration with LinkedIn. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Ryan Holmes is the CEO at Hootsuite.

Image: A businesswoman walks on the esplanade of La Defense, in the financial and business district in La Defense, west of Paris April 10, 2014. REUTERS/Gonzalo Fuentes.

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