May 16, 2018

Why Would I Need An Investor

I'm pretty new to the world of building websites/apps. So hopefully this doesn't come off as a really dumb question. So here it goes. For what reasons do online startups need investor(s)? In particular, startups building digital products such as SAAS programs.

I'm asking because, on the side, I'm working on an idea building a website that I believe has great potential. My expenses to build the site are very low (less than $100). My expenses to run the website are also going to be less than $100/month. Once the site starts scaling out, I'm sure hosting fees will go up in price. But that's about it. I'm also thinking I will pay for advertsing.

I read so much about startups getting investors to help them out. What costs are those investors helping them with?

This might be my ignorance thinking here, but in the day and age we live in, unless you need to pay someone else to create your idea, the cost to do it on your own is very low.

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    Hey Charles, interesting question!

    A quick bit of background first: I'm currently a very happy indie hacker, but did previously raise funding from investors for a SaaS startup.

    If at all possible, I do think it's a good idea to avoid taking on outside investment (except in very rare circumstances which I won't list here).

    That said, here's one reason why you might be tempted to raise investor funding for your new SaaS business...

    Let's say you stumble across a great business opportunity - you can build a SaaS product which helps plumbers finish their work 50% quicker. There's no competition, and there are 20'000 plumbers out there in the US who are willing to pay you $50/month for your product. Hosting/server/storage costs are almost $0. And the best part? When a new plumber signs up, they stay a customer for at least two years on average, so each new customer is worth about $1.2k!

    But you know what's sucky about plumbers? It's really hard to reach them and convince them to buy your product. Including advertising, marketing and the value of your own time, it costs you $300 to acquire each plumber as a customer. And even though they are happy to pay $50/month for two years, they don't have the cash/trust to pay it to you upfront.

    So even though long term your product is awesome and profitable, short term you won't survive, because each new customer is costing you net $250!

    And then add in the costs of taxes, accounting, customer support (all those plumbers need help understanding your software)...

    Oh and how are you going to build your product if you are out doing sales all day? Maybe you need to hire someone to help out...

    All of a sudden you are in a real dilemma. You basically have a great deal where you can pay $800 right now and get $2000 back within two years, but the problem is you don't have that $800 right now.

    Taking on an external investor is one way of solving that problem.

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      Hi Louis, thanks for this helpful reply. You bring up some good points. For me, I believe there is going to be a lot of manual outreach to get people on-board (sales). I have a friend who I believe would be great for this aspect. I'm just not sure how to bring him on-board. I don't have the ability to pay him and I don't really want to make him a co-founder.

      Also, I have a feeling customer support is going to be big for me as well. But I really think it's worth it as I truly believe this idea could bring in six to seven figures/year.

    2. 1

      Louis this is a great explanation of CAC/LTV.

      Thank you!

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    You highlight why it's one of the best times to be an indie hacker! The cost to start a business has never been lower because of commoditized hosting services, open source frameworks, and marketplaces of code/templates.

    That said, investors still have their place—mainly for scaling a validated problem/solution. It's a long, slow ramp of death to build a SaaS business ( and investors provide working capital to facilitate growth. While many services can be scaled up and down with ease, employees typically can't. Investment capital helps navigate the ebbs and flows of a SaaS business as well. I can tell you from personal experience building a business always takes more capital than you'd expect.

    Your intuition is right in any case—avoid investors as long as possible, until you absolutely need them, and you'll save that much more of the company for yourself. The irony is that until you absolutely need them to grow, you probably won't be successful raising anyway.

    At the end of the day, it all depends on what sort of business you're hoping to build and the capital required to grow it. Taking investment capital signs you up for a different kind of business and requires careful consideration. Like most things, it all depends :)

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      Hi JDR, thanks for this helpful response. So it seems like the biggest expense I will probably incur will be when I need to hire people. Makes sense. I could see myself, possibly hiring someone for customer support / customer outreach.

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    Here's my reason not to do it: If the main thing you will use the money for over the next six months is to pay founder salaries.

    I realize people come from all kinds of financial backgrounds and this statement could be received poorly. However, I think it's better to start a company on the side while having a full-time job (which I've done) or while freelancing (which I'm doing). If a business isn't making money, you have problems that need to be solved, and VC is a form of procrastination, not a solution.

    Here are some reasons that justify raising money: you have IP that needs lots of money to develop (like a medical device), if you are profitable and want to accelerate growth (like by hiring a sales team), or if you have a ton of early traction where you need a team (like a million pre-orders or Facebook-scale growth).

  4. 1

    You do not.

    I have such an aversion for VC hyped startups -arrggh!

    Majority of VC funded founders experience a mammoth dilution in their equity. To a point where anything below rockstar-level ($100m+) exit/acqui is really not worthy.. It really depends on your preference... Hypothetically speaking, owning 100% of $25M is better than owning 10% of a $500M exit after X more years of hard work.

    As some have already pointed out, there is a space for accepting vc/investors particularly if your startup is going to 'disrupt' that sector/field.

    Having said that, the best time to forage for investors is when you have product market fit, bit of customer traction and good all around indication that you are onto something. Investors, VC's in particular, drool over a bootstrapped startup(s) with $200k MAA. They will be very reasonable as you've leverage and they are aware that the deployment of the funding are to accelerate growth and scale-ability.

    Bootstrap till you can't no more!

  5. 0

    Some people think that raise money is some kind of validation for your product or idea. It is not. If customers want your product more quickly than you can deliver, this is the case you need an investor. In other words, when your product is already validated. There are other scenarios (like it is too expensive to build what you want) but for most online SaaS business like yours, wait until you get product-market fit. You will get more leverage to negotiate a better valuation and less pressure.

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      Thanks. Can you elaborate on what you mean when you say I "will get more leverage to negotiate a better valuation and less pressure?" Are you assuming that I will be selling my business at some point?

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        That's part of the deal with raising money and selling equity to investors—there's limited liquidity for them outside of a sale, so that's the path you put yourself on. If you grow big enough you can potentially buy them out (or they can sell of their shares in a subsequent round).

        What @gpires meant was the more you de-risk a startup the more leverage you have over investors during a raise (i.e. higher valuation, maintain more control, etc). If you raise early, you end up giving up more than if you've got proof things are working.

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        From what I've gathered, it's because you have product market fit, retention, customer traction and positive cash flow (or almost).. On the investors hand, your term sheets will be a lot better than if your startup was in their conceptual level/phase... On the acquisition side of things, your healthy equity will result in good exit; thanks to the term sheet.

        Ker-ching! Ker-ching!

        Essentially, it's two-fold strategy win.

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        Not really. To raise money the investor needs to know how much your company worth.