During my junior year of college, I raised $25,000 from an incubator in Pittsburgh for a startup called Tailored Fit.
There was no product, no revenue, no experience; all we had were a few team members and my public speaking skills. That seemed to be enough, though, since we’d later raise another $50,000 before burning it all and shutting down.
Over that year, we spent $75,000 doing what I’d call “playing startup.” We talked to investors, made five-year projections, launched a product, argued about cap tables, but we never actually built a business. I think we made less than $1,000 in revenue.
One thing I’ve thought about a lot since then, especially in the last year with Growth Machine and more recently with Cup & Leaf, is the issues with raising money, especially as a first time founder.
I think a lot of the wasted time and energy on Tailored Fit came from the fact that we had no skin in the game financially. The $75,000 wasn’t ours and we were under no pressure to pay it back. That made it extremely easy to focus on things that weren’t moving the needle financially: talking to investors, going to networking events, redesigning our site and product (which had no traffic and no users), and of course, raising more money.
It’s the raising money that is particularly nefarious because it makes you feel like you’re accomplishing something. If people are giving you money, you must be doing something right, right? And since I was better at raising money than making money, it was much easier to focus on that instead of the hard stuff like actually creating a useful product.
This, I think, is a dangerous trap for many would-be entrepreneurs. Especially for college students at fancy universities, there’s this notion that “starting a startup” means coming up with a huge idea, raising a bunch of money, and building a product(1). You’ll probably get the funding just because you have a good degree, and then you can end up spending a year or longer working on something feeling like you’re making progress when you really have no idea what you’re doing.
Anyone can fall into this trap, not just college students. The main problem is trying to raise risk-free money to work on an idea. That could be from investors, or friends and family, or grants.
If your goal is to learn how to build a business, though, I think there’s a better model: credit cards.
Assuming you have good credit, you should be able to get $15,000 to $30,000 or more in credit for your business, and with no interest for the first year(2).
Here’s how it works:
This is a trick from the travel hacking community. If you open multiple credit cards on the same day, the credit check won’t have time to make it onto your report, so you won’t get stopped by the other banks. If you do them on successive days you might not get past the first one since banks don’t want to give a bunch of credit to a new business, but if they all think they’re giving you your first credit card, you’re more likely to get approved.
I did this last month to fund Cup & Leaf and immediately got $28,000 in credit from a Chase Ink Business Cash and an American Express SimplyCash. It’s more money than I raised as seed money in college, but I did it in an hour or two one afternoon instead of spending months going through pitches and interviews and paperwork.
That’s the first benefit of this method: time. Raising money is a massive time investment that no one enjoys. Especially early on in trying to figure out if your business is going to work, you should be building the business, not making powerpoints(3).
The next benefit is ownership. You get to keep 100% of your business, instead of giving away a share of it to investors. This might not seem like a big deal, but having other people telling you what you should be doing because they have a stake in what you’re doing is annoying(4).
But the biggest benefit is the focus. When you’re self-funding on credit, you are completely focused on making the business work in a reasonable amount of time. You can’t afford to waste time on non-revenue-generating activities since you know that you need to pay back the debt you’re taking on. It would be much harder to waste a year on signaling and status seeking when you have money on the line.
Now, there is one obvious objection to this strategy: the risk. That money has to be paid back eventually, and if you fail to figure out what you’re doing, then it’s ultimately going to be your personal assets on the line. With investor money, they’re taking on the financial risk, so if it fails all you’ve lost is your time.
But like I pointed out with the focus element, I think this risk is a good thing. You should have some skin in the game to prevent yourself from playing startup for a year and wasting time and money on something that isn’t going anywhere. If you can’t make that money back in a year, or at least a decent chunk of it, then you probably don’t have much of a business.
And I’m not saying you should never raise money. Rather, that you should raise it when there’s a clear business case for it (inventory, scale, strategic, etc.) instead of raising it to figure out if your idea has legs or not.
There are very, very few businesses you can’t test and get started with $25,000. And if it truly needs more than $25,000 to test and get started (like, say, a car company) then that probably shouldn’t be your first entrepreneurial endeavor.
And you should be able to test the business for much less than that. Justin Mares has a great article on how he tested Kettle & Fire for a few hundred dollars before investing significantly more in actually creating the product.
So for new entrepreneurs trying to get their feet wet, I’d suggest this route. Make the LLC, open a few credit cards, and get started. You’ve got a year to figure it out and pay the debt off. Have fun.
1. There’s a great article on this concept from Collaborative Fund called “Great Products vs. Great Businesses.” A lot of first-time founders are trying to copy Facebook by building a popular product with tons of users and not focusing on revenue, but you need revenue to actually make a business. Here’s a great clip from Silicon Valley making fun of the idea.
2. Some might say “okay but what if I have bad credit.” If you can’t manage your own money, you probably shouldn’t start a business, and you definitely shouldn’t be trusted with other people’s money.
3. This I’ve noticed is another issue from too much education, is that people with business majors or coming from bullshit jobs like consulting will spend tons of time on business plans and pitch decks instead of growing the business.
4. Obviously, strategic investors who have good advice to give you are worth giving away a share of your business to. But a first-time founder without a product or revenue trying to raise “fund my idea” money probably won’t get very strategic investors, they’ll get dumb money.