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My Tech Startup Journey: Learning How To Fund A New Software Company

By Yaro Starak
21 Comments

Entrepreneurs-Journey.com has always been a sounding board for my own use as an entrepreneur. From the day I started blogging I wrote about what I was up to with whatever business I was focused on at the time.

Blogging is fantastic for all kinds of business reasons, but it’s also great as a tool just to write about what you are doing, which of course is at the heart of blogging (let’s not forget blogs started as online journals – “weblogs”). You can use your blog to get feedback, to even get therapy when you need it, or just to express what you are up to and see what happens.

I’ve gone from writing about my proofreading business and an English school (with an office in the real world), general entrepreneurship and blogging, internet marketing, creating information products and everything in between.

This year the trend continues and once again I am doing something new, something different, at least for me anyway. Let me tell you what I have been up to and thinking about…

Owning A Start-Up Company

As you probably know I’ve got a start-up called CrankyAds.com.

I’ve never called any of the other businesses I’ve created start-ups. They were lifestyle businesses, or even just hobbies that happened to make money. That’s not to say that some of them couldn’t have become start-ups (some people would have called them start-ups even if I didn’t), I just never felt like that was the direction I wanted to take them.

Why you might ask? It just seemed like too much work.

I viewed start-ups as a stepping stone to hiring staff, taking on investors, creating all these dependencies in your life all in the hope of creating something big.

I was against big on many levels. Making good money while maintaining lots of freedom was my goal, and as far as I could tell, start-ups were not about lifestyle or freedom.

That all changed of course when I decided I was ready for these sorts of dependencies, and I was excited about creating a company that was much bigger than just me.

CrankyAds is my first attempt at a true start-up. The mindset is different, the goals are different and the way the business is starting is different too.

I’ve got partners and contractors working on the project already, and we plan to have employees as well – in fact we can’t succeed without them. To scale we need help, and that’s something new to me.

We are also just about to start seeking out seed investors, strategic partners who can offer both financial support and strategic value.

Seeking Investors

It’s amazing how much work is required to make software. CrankyAds is barely out the doors and we’ve already put in a lot of man hours.

Although we are nearing our first 1,000 users as I write this, we really have only released half of what CrankyAds is. Our next major milestone is the release of what we are calling the “CrankyMart”, our marketplace to help link our bloggers (website owners) with sponsors (advertisers who want to spend money to reach new audiences).

We expect to roll out the CrankyMart in May, which will finally see us with both pieces of our company in the real world, serving people, so we can collect what we need most – feedback from actual customers.

In true lean startup spirit (our team have become devotees of the Lean Startup model, proposed by Eric Ries), which we have come to embrace more and more as our budget decreased and our schedule lagged on, we focus on releasing basic prototypes of our services so we can “get something out there” and start servicing real customers. From there we can iterate and build features, knowing a lot more about what people really want, not just what we think you want.

We have huge plans for what CrankyAds can do, and if the vision we are refining turns out to be successful, it will be unlike any other ad network out there. However we’ve realized to help us maintain growth and focus on what is important, we need a little propping up from investors. We’re not in need of millions of dollars, but just enough to help us expand our technology to meet the needs of our audience.

Hence I’m doing something else I’ve never done before – I’m looking for investors.

Learning New Things

It’s funny how things change. I never used to find techcrunch.com all that fascinating. It seems like a website that just reports one capital raising announcement after another. Now, since I am learning all about how to fund a startup, suddenly all this appears so much more interesting.

Silicon Valley suddenly appeals a whole lot more too. While I’ve always wanted to visit the home of so many VCs and Angels and startups before, more so just to hang out in such a tech orientated city, now I want to go there and participate in the movement.

The idea of working on a startup surrounded by others who are also working on startups is very exciting. It is like finding a place where you are no longer the odd one out for being an entrepreneur.

The CrankyAds team has evolved into what I see as a good core set of roles. We have one person working the code, another working design and another helping secure sponsors for clients. My role is what you might expect from a CEO/Founder – I have the connections to help with distribution, but I’ve also realized that part of my job is making sure we have the funds to keep this thing going (which I have heard is fairly typical for a founder).

Initially I funded CrankyAds myself before I had partners. Then when Walter my first partner came on board and we continued to use our own personal funds and time to keep things going. That was until we ran out of money, which happened earlier this year. We had a budget, and most of it has gone into development of our software thus far.

Before I never truly understood why people needed funding. Why not just self-fund? Either use your own money or funnel back in money from your new business to keep it growing. I can see now that sometimes the numbers are not going to work that way, and in fact you find yourself in a some annoying catch-22 situations where funding can help you bridge gaps.

It’s amazing how so many times you find yourself in a situation where you need to work on one thing, that leads to working on something else, but without that something else, the first thing doesn’t work.

It’s especially true with the model we are using with CrankyAds. We need two groups of core people to make the business function and balancing the needs of both groups is a challenge, especially given how co-dependent they are. Like eBay with the need for both people bidding and listing things for auction, we need to satisfy website owners and advertisers, and need enough of both groups to have a viable business.

In short, we rely on network effects, which is great once you gain traction, but it takes some time to reach that tipping point. I feel we are close, but not quite close enough to carry us through to the next stage without funding.

Juggling Resource Allocation

CrankyAds could benefit from a period of focus on simply attracting new users (the supply side of the equation), learning what people want, and developing features to meet those needs (we are doing all these things, just not 100% of the time).

However, if we did just this, well, we won’t make any money. That’s fine if you have a huge amount of capital in the bank you can rely on for a while, but we don’t.

This isn’t necessarily a bad thing. It’s forcing us to think about profitability today and really push something out to market to see if people use what we are creating. We are focused on core functions and unleashing them to the world even if we would feel better spending more time fixing bugs and developing features.

This budget constraint has lead to another unexpected challenge: With only a finite amount of hours available from each team member, what goals do we focus on?

For example, most of my tangible contribution to our company thus far has been letting people know about CrankyAds. I’m the marketer, basically the entire source of distribution to this point. That’s what I should be of course, giving my background as a blogger, my connection to the blogging industry and you, my reader.

I’ve also had important roles in terms of deciding strategic direction and what features I would want as a user of the product. Since I was the first blogger using CrankyAds (I was the first customer), that helps when it comes to deciding what features people want (it’s good to be your own customer).

My latest task, as I mentioned, is to seek funding. This is a very important goal, in fact it’s possibly the most important goal right now. Unfortunately to work towards this goal I have to take time away from other tasks, things I could be doing to expand exposure for CrankyAds.

Instead of spreading the word about our tool, I’m writing an investment prospectus, attending events to meet potential investors, reading about funding, etc. I enjoy these tasks, but part of me feels incongruent. I feel like I should be spending time on building on what we have done so far – and I have one massive marketing to-do list for CrankyAds – yet I’m putting all that on pause while I look for capital.

It’s ironic too, that to impress potential investors you want to show some solid early adoption numbers and initial sales, proof that people are using your product and your business model works. Yet to get funding, you have to devote time you could spend on creating more of this initial proof, to hunt for and negotiate with investors.

Remember how I mentioned we face many catch-22 situations? Yep, this is one I’ve experienced during the startup phase.

We’ve had similar challenges with Walter, my co-founder and lead developer. He’s put in thousands of hours coding CrankyAds. He could put thousands more just in feature develop for the core service – the CrankyAds ad manager – but we have to test our business model too, so we need our marketplace. It is the side of the business that can deliver revenues for us.

If we had funding, one of the first people we would hire is another developer. This would result in Walter having an extra pair of hands. I’d like to hire two more developers, I know speed of implementation is critical, so the more people working the code, the better.

This would allow Walter to focus on one area, while other team members work on the huge list of development needs we have. We could do more and act quicker. We could have been in a position to go after funding months ago with more developers, yet we need the funding to pay them. Catch-22, again.

The Learning Continues

Regardless of these catch-22 situations, and our frustrations that come from having lack of resources, I am confident we can find the right investors and move on to the next phase. We have a good product, some solid early results and plans for the future to become a successful, self-sufficient company.

Just the idea of having a year or two worth of capital in the bank so we can work on delivering a great product, is very exciting. It will mean everyone in our team can focus 100% on what they are good at – developers developing, designers designing, and marketers like me, spreading the word – and we can do so 100% of the time.

My next job is to write a prospectus to send to certain key people who I think would make ideal investors. If you know anyone any investors who are in the blogging or online advertising industries, or who I should get in touch with, please send them my way (email – supportATcrankyads.com).

And of course, if you are a blogger and have yet to use CrankyAds, please go play with it and let me know what you think (leave a comment to this article). It’s knowing what you want as a customer that can help us the most, so we cherish feedback from people who use our product.

Yaro Starak
Seeking Funds

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21 Comments

  • Somehow, I feel like my mindset changed after I read this post. I used to be a one-man-operator. Taking a partnership is like taking my freedom away. But it seems like “two head is better than one”.

  • Yaro, great article. I really like learning about the catch-22′s a start-up faces. What made you decide to go the route of seed investors (vs. some other way of getting capital)? Is it because of where you want CrankyAds to end up?

  • Great post. You brought up quite a few points that I either didn’t think of (or subconsciously refused to think of lol). Thanks!

  • Barely four weeks ago I pitched an idea at a business launch weekend and a few days later I was heading my first tech startup so I totally understand the world you talk about.

    Thankfully the launch weekend was attended by many investors who have already expressed a desire to invest in our project.

    I strongly recommend you search for startup communities within your local area and startup events. Here in Birmingham UK we have a very vibrant startup community which I only happened to venture across some four weeks ago.

    I was introduced to many investors and talked to many people who had received large investments for nothing more then an idea on paper.

    Investors do not always need to see traction before they invest. This is a common misconception. Investors generally only see an great idea, a great team or something they really like you you…

    So many of the investors stressed these three elements and stressed also that they invested heavily in companies that had zero sales too – simply because the team or enthusiasm was as important to success as anything else.

    Just a misconception I wanted to clear up.

    (I’ve also been given 6 months free office space in the centre of Birmingham simply on the strength of the proof of concept we created in one weekend…. not to mention the numerous high profile events I have been invited too. Stuff I did not believe was possible in such a small period of time…)

    • Hi Dee,

      Thanks for the feedback. I’ve noticed a lot of startups seem to get funding regardless of having any revenue – heck, instagram just sold for 1 billion without any revenue yet.

      The challenge – the part I need to understand – is how to you convince an investor to give you X dollars for Y percentage, when you are basically making up a value of how much your company is worth today even if you have no revenue?

      Do you just pick a number out of the sky or potential based on future market share? It sounds like investors don’t care about what the company makes today, rather they invest in the team or the vision and simply ask “how much money do you need to make this work?”

      Does that sound right? If it does, it seems very much like the dot com bubble days.

    • Hey! I am wondering — if all you present is the idea, with no tangible product, team, etc., couldn’t the person you are pitching it to just decide to steal it?

      • They could, but that’s not what they are interested in doing. An idea is worth nothing more than the people who are behind it executing. Investors are not looking to build a business, they are looking to invest in them.

  • I would suggest using AngelList. It is a great platform and lot of companies have been successful raising money using it. Here is a link to their site, http://angel.co/

  • Good post yaro but I would strongly argue against the model of putting a prototype out there and  waiting for people to tell you what features they want, like or need. That’s what businesses did in the 80s. 

    These days, to innovate, YOU need to tell users what they want and what they need before they even know it.  Because if you leave it up to them, innovation and breakthroughs are unlikely.

    Usability testing is still fundamental but feature testing is a waste of time and a massive distraction. You need to have the  insight and “follow-through-mindset” of knowing what your potential users is going to think, want and do when he lands on your site/app/etc.

    • Hey Al,

      I agree, to a point – you need to have assumptions, faith based assumptions on what you think the market wants, but from there you need to test those assumptions quickly using lean products, – minimal viable products as Eric Ries suggests in Lean Startup.

      Have a read of his book and let me know what you think. I’m going through it now and it’s definitely made me think a little differently.

      • Greg

        Think about it like the stock market Yaro. All companies valuations are based on future cash flow. A company could be valued pretty high even if it doesn’t generate any profit, yet. It’s all about future cash flow.

  • Hi Yaro – I’ve been through funding rounds in the past, usually comes down to a combination of…

    1. How clearly and enthusiastically you can explain your business concept, who will use it and how you will make money
    2. Why YOU and your management team will succeed…this is a big one, if you want to get early funding without sales they must believe in the management team (that you have the right partners with the correct experience and background in place). Sounds like you have the technical side covered and you certainly have credibility in the marketplace, what would be of high value is someone with a background in online advertising (knows the ad space) and someone who has either operational or financial background so they trust their money is in good hands
    3. At least a couple of clients that vouch for you and your approach to what is a fairly competitive space
    4. Sales will always help, but #1-3 are more important in my experience.

    Finally, it takes ALLOT of work to find the right match…but you only need to find it once or twice to get you to the next stage when you have some customers and it gets easier to raise the next round.

    The guys that I find do this well bring someone in that has a track record either in the industry you target (Ads) as well as a track record in business.

    Hope that helps,

    Jeff

  • Hi Yaro,

    Nice post mate, good to take a see how your entrepreneurs journey is traveling.
    I don’t know much about funding and start-up’s but have you thought about bloggers like Brian Clark from Copyblogger or Tim Ferris as possible investors? I think you have interviewed them both? Brian and copyblogger media have been building developing website software products (I use them and they are very good) as a major part of the business nowadays. And maybe Tim Ferris; he invests in start ups.
    All the best.

  • Hi Yaro, have you thought about crowdfunding, where we could all invest a little bit? I’ve checked them all out and I’m using IndieGoGo.com to try and raise funding for one of my projects, it’s truly international, has a big twitter following of it’s own and you get to keep the money you raise, even if you don’t hit your target. The other thing I liked is that you can come back for more, so tranche your targets. I’d love to invest a bit in this as I’m a user and 1000 users x $100 say, would take you forwards perhaps! Cheers, Nicola

  • Ive been in business a 4 months now and have a partner and its great two heads are certainly better than one and you have a clear sounding board if your both trusted and honest

  • Thanks Yaro, for one more excellent post about your experience. Having a partner seems more and more appealing for me after reading what you have to say about it.

  • Joe

    Who is your competition?

  • Brent Giesler

    Wow. Very enlightening, Yaro. As a developer, it’s great to get a look at the other side.

  • Vivien

    Should you want to sell out in the future at marked down price, inbox me.

    In the meanwhile, I wish you dazzling success!

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