5 Guidelines For Financing a Startup

Ryan Holmes, CEO of Hootsuite, talks about these three questions in the context of Hootsuite's history.

Do you remember the Color startup? The photo-sharing app, which promised users the ability to view and share photos with people nearby, was launched after securing $41 million in funding. But less than two years later, the app died because it didn't attract enough users and changed its strategic focus in the middle of the process. It's a classic case of a startup that gets too much funding and rises too quickly.

But what was the problem? If we put Color in today's hot startup environment, would a startup like it, with the ability to raise huge amounts of money, be able to avoid repeating the same mistakes? Let me take the journey of my company's development to illustrate this question.

In the space of six years, we have grown from seven to 700 people and have learnt a lot about the world of financing along the way. While every startup is different, in my opinion there are some common principles for startups to follow - why to raise money, when to raise money and how much to raise. If entrepreneurs can form clear answers to these three questions, they will avoid many pitfalls on the road to entrepreneurship.


1,Lean startup
One of the biggest benefits of starting a technology company is that it is relatively inexpensive, from the idea to designing the product and testing it. Often, you don't need to invest too much in infrastructure in order to get an idea off the ground. Because the only problem before you is to turn the idea into a product as quickly as possible, which is not yet mature. After the product has been produced, let some of the users test the product and adjust the direction of your development based on the comments. Of course, in the previous example Color has certainly solved this problem.

Take our experience in 2008 as an example: we released Hootsuite in a low-key way, it was actually the standard minimum viable product, a very simple and basic APP that looked like a hastily cobbled together product designed to enable the management of multiple social media accounts through one platform. In the first week of release, the number of user sign-ups spiked and on seeing this, we decided to appoint a team of engineers specifically to develop the new tool. We are making adjustments based on user feedback, using data to assess exactly which features are critical for users. In fact, it was the only way we knew we did have a certain first mover in the market, and it was at this point that we went looking for financing.

2, Decide whether to raise funding based on the market environment
If you really think that your product is a product with potential, should you immediately go looking for financing? The answer is that you should decide whether you should go for funding based on the market environment at the time. If you are developing a project that no one knows about, you have few real competitors around you, and if your idea does not require too much capital to complete, then you should use as much of your own money as possible to start your business and maximise your assets while avoiding outside interference.

If, on the other hand, your company is committed to rapid growth, the competition is stimulating enough to threaten your position in the market or even to determine whether you stay or go, and you need capital to maintain your current situation, it is time to seek external financing. This is in fact what Hootsuite has chosen to do.

After we launched Hootsuite, we relied on our own funding for a full year, but at that time the market was becoming increasingly competitive and we were moving slowly. Faced with this situation, our immediate priority was to expand our market share as quickly as possible. So, a year after the launch of the product, we secured $1.9 million in Series A funding.

3, Reasonable expenses
Money can certainly change a lot of things, but it's not a panacea. After our first round of funding, subsequent investments followed, and it was because of this money that we were able to hire top engineers to build a world-class product, acquire competitors, put executive talent on our board, and rent offices big enough to accommodate our growing workforce. It was also because of this money that we were able to be the first winners in the market to win.

But in the process, we haven't changed our principles on overheads: we don't waste a penny. So, our office environment is just big enough, it's not as luxurious as you might think. It was a warehouse in Vancouver with second-hand furniture; we didn't spend money on parties to celebrate the success of our funding; and our sales staff travelled on a frugal basis.

As traditional advertising was expensive at the time, we pushed ourselves to find other ways to increase our exposure. One of my greatest hits was at SXSW 2012, when we bought a second-hand bus and dressed it up to look like our icon: an owl! The cost was much less than having a product presentation at the conference. But after the event, our product got a lot of exposure in USA Today and several other newspapers.

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