Funding Your Business: When Should You Bootstrap or Raise Capital Externally?
Updated: Aug 18, 2021
- The Journey of Michelle Eichner
As a startup company, you may choose to bootstrap your funding. In fact, some business owners find it more comfortable to do so, as was the case for Michelle Eichner and her first company. From bootstrapping her company to success, she talks about her journey to creating a financial model that works. According to Michelle, it is important to make assumptions and predictions for business growth, such as when and where to increase or reduce your financial resources.
Michelle also talks about why she eventually adopted capital raising for her second company. Building her digital product was a more competitive venture than her previous emailing platform. She explains why bootstrapping was no longer an option in this case. Furthermore, Michelle tackles the benefits of attracting investors and using special purpose vehicles.
When is the right time to shift from bootstrapping your business to raising external capital? Listen to this episode so you can learn about capital raising.
Here are three reasons why you should listen to the full episode:
Learn how Michelle transitioned from bootstrapping her business to raising capital and seeking investors.
Explore how using special purpose vehicles can help you for capital raising.
Find out why business projections are crucial for your financial model.
Visit Christina Sjahli's for more insights on capital raising in Toronto, Canada using SPVs on the Her CEO Journey podcast.
Chat with Christina about capital raising, and set up a time here!
Are you getting ready for capital raising? Identify the financial gaps that can stop you from building a profitable and sustainable business. Download this quiz!
Download this Action Guide to help you determine the best type of funding for your business.
Connect with Michelle: LinkedIn
[04:53] Starting as an Entrepreneur
Growing up in Chicago, Michelle has always been business-minded.
Her first business was Pivotal Veracity, an email delivery platform.
She bootstrapped this business with a former classmate during the 2000s.
Six years later, Pivotal Veracity was acquired.
[06:44] Michelle’s Second Company
Digitile is a document tag management solution for companies that use Google Drive and Dropbox.
They find solutions for an easier way to distribute content. With a lot of files for companies, Michelle researched how to use tags for locating these documents faster.
Digitile helps employees organize their documents using contextual meaning.
They serve businesses of all sizes but focus on e-commerce vertical tech and residential real estate firms.
Digitile gained momentum during 2018. She bootstrapped her business for 3 years and eventually sought investors.
[12:14] Raising Capital for Digitile vs Pivotal Veracity
The two companies have different business models, price points, and marketing strategies.
For Pivotal Veracity, the price point for their products was relatively high at $1200 per customer per month. As a result, they didn't need as much capital.
Conversely, Digitile’s ASP was $10 per customer per month, and needed significantly more customers to run.
They need to move quicker in raising capital and capitalize on the market.
Tune in to learn how capital raising, can help your business run.
[15:24] What If Digitile Was Founded in the 2000s?
This type of company has more upfront and back-end costs.
It was expensive back then to build a business in the cloud space and SaaS areas.
You should also consider if your product is a “must-have” or “nice-to-have”. In today’s business environment, Digitile is becoming a must-have.
They help prospective clients see that having Digitile can solve a repetitive problem for their employees.
[18:46] Raising Capital for Digitile
Michelle didn’t make a predetermined decision for Digitile.
Digitile had to prove itself before figuring out what it wanted or needed to do.
She eventually realized that she needed to raise capital to move forward.
Before doing so, they had to identify a few key metrics regarding the market.
[20:32] Digitile’s Financial Model
Digitile has to continue making assumptions in its financial models.
They make sure to update the models at least once a year.
Digitile is currently on its fourth financial model.
They know the value of testing hypotheses and learning from the data they obtain.
"Everything's a hypothesis until you prove it. You start with your hypotheses then you start to hone those hypotheses. We have absolutely changed our model over a couple of years. We are now on probably our fourth model. We understand absolutely what our value prop is, we understand a heck of a lot more today than we did even a year ago."
[23:09] The Changing Model of Digitile
Digitile was always a SaaS subscription model. What changed is their assumptions by adding more variables.
As they identify the value proposition to the market, they determine the price point. Sometimes they create higher-priced packages now that they know their value.
If you know your numbers, you know which the most effective levers to pull are.
“But we know enough to know what levers within that funnel that we need to pull in order to do a better job, in order to hit out revenue metrics.”
Want to learn more about the best financial model for capital raising? Tune in to the full episode!
[27:39] The Benefits of SPVs
Digitile considered other traditional financing paths too. Then, they met Assure, an SPV specialist.
SPVs were attractive because it’s easier to manage smaller individual investors in this model.
SPVs bring cap table benefits in terms of the minimum requirement investors can take.
Assure understands the community of investors. They act as a bridge between Digitile to potential investors.
SPVs can help you save time as you are capital raising. Find out more in the full episode.
[33:01] Determining the Amount of Investment
Digitile determined 50,000 to be the minimum amount for interested investors.
Michelle picked this number because they didn't want a lot of people on their cap table.
It's less difficult to communicate to your investors when you have a smaller cap table.
“The smaller you can keep your cap table, the less headache, if you will, for the founder, and the less overall work. Because they then communicate, you communicate to, in this case, Assure, on a quarterly basis, and then they then communicate with their with all the investors that are investing in your portfolio.”
[34:51] A Checklist for Capital Raising
Evaluate the stage of your company before you start thinking of capital raising.
You need to know your financial numbers.
You also need to have a great elevator pitch. Explain the problem you are going to solve concisely.
“A well thought out pitch deck that explains the story from the problem to the market, the value prop, gross potential, how additional capital will be used to grow the business, those are all important pieces I'd have on my checklist.”
Have customer references to show your VCs.
Have a database of targeted VCs and align them based on the stage of your business’s growth.
[37:02] Understanding Your Financial Numbers for a Well-Thought Pitch Deck
In the early stages of your business, you are still trying to prove your assumptions.
In presenting for investors, however, you need to have a well-thought-out financial model.
“Everything has to be linked. And you have to be able to demonstrate the fact that the totality of the financial model, in conjunction with all the parts makes sense. And it's not that any one lever may be incorrect. It's just that the logic behind the model is worthy.”
You need a deep understanding of where to put your money.
You may underestimate or overestimate costs — this is okay. What matters is that your financial story makes sense.
Business finance is not a standalone process. Look at all other business processes too. Tune in to know how a CFO can help you go through capital raising!
[42:52] What Michelle Would Do Differently
Michelle shares the struggles of licensing the open-source technology they use in her first business.
They were unaware that they might owe royalties to open-source developers of the technology they used, depending on the license.
Digitile is in the process of analyzing the licenses of all the open-source software they’re using.
They will be looking for replacement technologies in the event that they violate any of their licenses.
[48:02] Hiring a CFO
When the business requires Michelle to be elsewhere, she will hire a CFO.
At the beginning of your business, you must get your financing right. So there is value in seeking professional help.
Listen to the full episode if you want to know when to hire a CFO for capital raising.
Michelle Eichner is the co-founder CEO of Digitile. This search engine software helps keep company documents. Digitile is a sign-on platform that consolidates cloud spaces such as GoogleDrive, Dropbox, OneDrive, and iCloud. Through this, thousands of employees find their files and documents with just the use of contextual tags.
Michelle is also the co-founder of Pivotal Veracity, a multi-million dollar bootstrapped cloud startup. Aside from this, Michelle provides product and management strategies for IBM’s Digital Marketing Solutions. As a Product Director for IBM, she helps connect brands to customers in finding marketing solutions.
Michelle graduated with a BS Marketing program at Drake University. She later got her MA in Direct Marketing at Northwestern University.
If you want to reach out to Michelle, you can find her on LinkedIn.
Powerful Quotes From This Episode
"So that's another thing that comes into play, which is, is your product a must-have or a nice-to-have? And I think we are growing — the product Digitile is becoming a must-have. But it's also an education as far as why it's a must-have."
“One of the many nice things about the SPV, if you will, is they can help you create a single point of communication there. They can consolidate investors.”
“They [Assure] marry essentially, right, the investors with the startup, and they do a lot of the pre-work of saying, ‘These are targeted investors that are highly likely to be investors, and make sense, based on what your business is, what stage it's in, and the thesis that you're solving.’”
“Be prepared to know, know your numbers. The majority of companies that get invested in have some track record with some revenue or at least user growth. It can talk through their numbers as pertains to number of users on their service or product.”
“I actually recommend you having someone in your network that you pay when you need the help. And you need to recognize when you need the help because you're, it's just gonna take you too much time to explore it, learn it, and you still may not, you know, execute correctly.”
Enjoy this Podcast?
Are you thinking about raising capital? Find out the best type of funding for you and how you can make it work for the stage of your business's growth. Michelle Eichner also shares why a pitch deck with a sound financial model is vital, as well as how SPVs can help you.
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