Successful Startup Founders Invest In Their Own Ventures
It’s nearly impossible to grow a startup with zero capital. For one, you’ll need to show investors that you’ve contributed to your startup financially at some level. Two, you have to present investors with more than just an idea, and the only way you can turn that idea into a product is by having some money to develop it. To ensure that you achieve these two things and make your money go as far as possible, you’ll need to keep track of the money you spend and plan your spending carefully.
Why investing in your startup is a must
Unless you have a very confident and wealthy individual willing to fund your startup from the beginning with no questions asked (which is highly unlikely), your startup won’t get very far without you spending some of your own money.
You need to put money into your startup if you want to be able to develop your product and a sustainable business model. Founders often try to go straight to the fundraising stage, assuming that they’re ready to pursue outside investment, but they are not prepared to show investors more than just an idea. Pitching investors on unproven ideas usually doesn’t end well. Without something concrete to present, like a prototype, founders’ chances of raising money from outside investors are slim to none. Gust collected data from 6,000+ startups and found that 95% of startups who raised money beyond the friends and family round had an MVP or prototype.
Most investors will want to know how much of your own money you’ve put in. Funding your own venture demonstrates to them that you have skin in the game and faith in what you’re doing, which in turn makes them more confident to invest. By investing some of your own funds, you’re ensuring that you actually have a shot at obtaining money later. In short, if you plan on raising money from outside investors and want to improve your chances of fundraising success, invest in your startup beforehand.
How to invest in your startup: plan and track your spending
It’s easy to get excited about your startup and want to grow as quickly as possible. When you’re ready to spend money chasing your startup dream (and, of course, after you’ve incorporated), you’ll want think critically about how you will spend it.
Many founders will either contribute a lump sum or take a “spend as they go” approach: they’ll put money in to cover the cost of something as it becomes necessary, rather than determining how much they need ahead of time. Paying to solve needs as they arise makes sense for a lot of founders because they either don’t have a lot of money to spend to begin with or they’re not quite sure of their direction yet.
If you decide to put in a lump sum at the beginning, you might consider generating a plan to determine how you’ll spend the money. Your plan could consist of a breakdown of what you need in order to develop your MVP before you seek outside investment, and the time and costs associated with each step in the development process. These needs could include tools and programs, workspace, team members, and any additional resources such as an attorney (you should definitely hire one) or a startup advisor.
Most founders will end up rolling the money they invest in their startup into their own equity stake, but some will go the loaning route. If you plan on loaning money to your startup, you should have an attorney document the loan and its terms regarding repayment and consequences for repayment failure. Ultimately, you and your board will decide on these terms. If you choose to invest in your startup in exchange for equity, it’s important to recognize that your shares could end up being worth nothing if your startup does not succeed, so in that case you may get no return at all. The same thing is true of a loan—if your startup fails, your loan will essentially be a write-off. Whether you choose to invest the money or to loan it to your startup, make sure that you are documenting everything and keeping it organized, so that when it comes times to file your taxes, you won’t be hit with any surprises.
Regardless of how you contribute capital to your project, you’ll need to keep track of where and how you spend the money for several reasons. The first is taxes. The government needs to know how much money you’ve spent, on what, and when, so you’ll need to have complete records dating back to day one of your startup. The second is investors. If you plan on doing any outside fundraising at any point in your startup’s life, tracking your expenses from day one is critical. Investors require that financial information be presented according to Generally Accepted Accounting Principles (GAAP), so ultimately, you’ll need to hire accountant. A certified accountant is really the only person who can ensure that you are adhering to GAAP, and you should start working with one as soon as possible—the longer you wait, the more it will cost you, since the accountant will need to retroactively organize your company’s entire financial history and you’ll need to pay them for it. But, at the absolute bare minimum and in the event that you cannot hire an accountant on day one, you should at least be tracking expenses on your own until such time that you can hire someone.
How much money should you invest in your startup?
If you decide to put money in as an up-front lump sum (or just want to cap your spending at a certain level), you’ll have to pick a number. Determining how much of your own money you should invest will be based on a number of factors, but in most cases it has to do with how much you are willing to risk or how much more of a stake you want to have than your co-founders. You’ll need to negotiate the actual relationship between up-front money and equity with your co-founding team, but consider your investment primarily in terms of where you intend to spend it. While it’s best to try to build with as little money as possible, you also don’t want to be cutting corners or underestimating how much you really need. Too much or too little can lead to different sets of problems.
How much you put in will also be relative to your earnings and your contribution capability. A college student or someone in their 20s attempting to start a company probably wouldn’t be able to contribute as much as a seasoned professional with thousands of dollars of savings in the bank. Some very successful companies have launched with as little as $10,000. But $10,000 may be a lot more to a student than it would be to an experienced entrepreneur.
The bottom line is that, if you want your startup to be successful, you should put money into it. But, like any investment, don’t go into it blindly: know what you’re getting into, and make a smart investment by planning carefully.
Keep your books clean and GAAP-compliant for less.
This article is intended for informational purposes only, and doesn't constitute tax, accounting, or legal advice. Everyone's situation is different! For advice in light of your unique circumstances, consult a tax advisor, accountant, or lawyer.