It’s not exactly easy to build a company that sells for eight figures. That’s why I learned pretty early on to get help when I need it. It took us 10 years to get to the point that companies had any interest in acquiring us, and it was an emotional roller coaster filled with highs and lows alike.
I ran an artificial intelligence company in the manufacturing space – our software could predict breakdowns and maintenance issues for large machinery. We bootstrapped it for the first eight years, funding ourselves by charging for consulting services. We survived the financial meltdown in 2008. And we even overcame the naysayers who said the market didn’t need our product.
After all that grinding, a major public company approached us for acquisition in 2016. Six gut-wrenching months of due diligence and negotiation followed before we got our deal across the line. Suffice it to say, I learned a lot.
Now I’m on the other side of the table, investing in startups building the next generation of AI products. I see a lot of these founders repeating the mistakes I’ve already learned from.
Here’s what I wish they knew:
Ignore what the competition is doing.
When you’re a small startup with limited resources, even a competitor’s press release can be intimidating.
It happened to us more times than I can count. We’d see news of a new competing product and immediately enter panic mode. But we learned over time that there was often little substance to these releases. The only threat that mattered didn’t come from the competition; instead, it came from getting sidelined and distracted.
Your competitors will always make noise. Ignore them and focus on what you can control. It’s critical to make sure their noise doesn’t influence your focus and decision-making. Years after we were acquired, we realized that the companies we used to be afraid of were more afraid of us.
Use third parties to break stalemates.
I was fortunate enough to have an incredible relationship with my co-founder. We didn’t always see eye to eye on everything (who does?), but we always respected each other. Over the course of our partnership, there were moments that occasionally saw us deadlocked or needing resolution.
We found that having trusted mentors and external consultants can help you through these critical moments. Their experience and outside perspective can provide an unbiased third-party view on the situation and clear up disagreements.
Bootstrap for as long as possible.
We launched our company in 2006 and didn’t raise any external capital until 2014 — just two years before our acquisition. As a result, we only gave up 5% equity (and a single board seat), preserving 95% of the equity for our team.
We funded our early operations with consulting fees, offering services directly related to the product we were developing. Our consulting not only generated instant revenue, but it also helped us gain critical insights into our target market.
A startup should have a minimum viable product with beta users or actual paying customers before they raise any money. With all the open-source and freemium products available, the barrier to developing an MVP is lower than ever.
The more viable your MVP becomes, the longer you can wait to raise capital. You’ll have more opportunities to validate your product and get real user feedback.
Raise money on your own terms.
Because we were self-sustained, we got to raise money on our own terms and timing. Not all startups can afford this luxury, but it’s one that every company should aim for. When you raise capital under pressure, you set yourself up for pain down the road.
We were admittedly paranoid in our early days. We turned down several verbal offers because the terms were uninteresting. We didn’t want to raise money and have a vesting schedule. These situations meant we could potentially be fired from the company we had worked so hard to build.
The longer you wait to raise capital, the more likely you’ll get to do it on your own terms.
Have a clear exit plan and terms.
When we sold our company, we entered into the negotiations with clarity on what we wanted. We knew where we’d be willing to negotiate and where we wouldn’t budge. This made it easy to filter interesting deals from the uninteresting ones. Make sure all the company’s stakeholders are of one mind when it comes to what matters in a deal.
Entrepreneurs ought to examine those who’ve come before them to study the challenges they faced. Instead of starting from scratch, they can form a base of knowledge to operate from and use it to get ahead more quickly.
If you’re an entrepreneur experiencing hardship, just remember there are people who’ve been there before.