Steve Tingiris on Unconventional Strategies to Fund Your Startup

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Today on the Early-Stage Founder Show, I’m talking with Steve Tingiris, a serial entrepreneur and angel investor. But Steve isn’t here to say you need to go down the traditional path of fundraising. 

Instead he talks about the different funding options for founders, and draws on his experience of selling 3 startups himself (as well as investing in many others) to share honest advice about how to make the best decision for you and your business.

This advice is important for any early stage founder, especially if you are thinking about starting the fundraising journey soon. 

Venture capital may be the right path for you, and for many it is, but it’s important to ask the right questions upfront, and today Steve shares what those questions are.

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Where to learn more:

If you have an idea and you're trying to figure out if it's something that could be fundable, check out DabbleLab.com or follow them on Twitter. If you have a business that is up and running, you're seeking funding, and you're based in Florida, then head to FloridaFunders.com/Apply for details on how to submit a funding application. To contact Steve directly, you can find him on Twitter or tune into the podcast to get his email address.

Transcript:

Andy Baldacci:
Right now you're the founder of Dabble Lab. You're also a partner and investor at Florida Funders. Can you tell listeners a little bit about what it is that you do and how you actually got there?

Steve Tingiris:
Yeah. I like to say my professional career has really been a big dabble, varied interests and short attention span in some cases, and bounced from one thing to the next. Fortunately it's worked out in my entrepreneurial life. Over the past 15 years I've started four companies and exited from three of those.

Andy Baldacci:
Wow.

Steve Tingiris:
I'm a software engineer by my skillset turned entrepreneur, but all early stage stuff. I exited from the companies that I started early on, so under $2 million in revenue in each of those in all cases. The businesses have grown from there. Dabble Lab is kind of a continuation of that, but rather than being, I suppose, a serial entrepreneur at Dabble Lab, we are trying to launch multiple startups in parallel. We work with other entrepreneurs and typically non-technical founders. It starts very early at the concept stage, and we work to flesh out an MVP or early product and get to the point where we can determine whether or not it's something that might be fundable.

Florida Funders is later-stage stuff, so at Florida Funders, we invest in … It's a network of accredited investors, and so it's sort of a hybrid angel network/VC fund that we invest in early-stage companies, but generally companies that need $250,000 to upwards of $1 million in early stage funding. They've got more traction than the companies that I'm working with through Dabble Lab. Dabble Lab companies, again, are really idea, concept stage. The companies that Florida Funders would focus on have some very clear traction. They're moving in the right direction and show a lot of promise and need some early-stage capital to get them to the next level and help get them to the next level.

Andy Baldacci:
I wish we could really go deep on the parallel entrepreneurship, because that's something that I know a lot of people with similar personalities to ours, where we are jumping from one thing to another, that's what they do. That's what they end up doing, but it's a difficult challenge. Today, I think what we really should focus on and we talked about before was the options for funding. For you, one might … First, looking over your resume, looking at what you do, they might think that you're going to push everyone to go the angel route, then they raise a VC round, then just right off the bat, that's the way to go, you need to do that, but that's not the case at all. I'm curious. Where do you think a founder, an early-stage founder, what things should they be thinking about when it comes to making that decision on how to fund their company?

Steve Tingiris:
I always think of it like this. If you could, if you could wave a magic wand, you would build an incredible company that is super profitable, and growing, and sustainable, and all of those things. You do it without raising money if you could. If you start from there and think about it, you really ought to be thinking through the options that don't require you raising money first. When you talk about funding a company or a startup, a lot of times immediately people think, "Let's go find an angel investor or let's get ready to go pitch to VCs." There are lots of, lots of ways to fund a company, especially in the earliest stages. I think you really as an entrepreneur are better off thinking like that and really only considering outside funding when there are no other options or you really see an opportunity to accelerate growth dramatically with the money. Maybe you're in a position where you don't necessarily need the capital. You can survive and the business can grow without it, but it could really grow or take advantage of a really big opportunity with additional capital.

Andy Baldacci:
Is there a reason why you think it should almost be … It seems like there were two things you said there. One, if VC money, not necessarily [institutional 00:05:28], but if any real funding around that could demonstrably accelerate your growth, then go for it. The other one you said is, otherwise make it be a last option. Is that just for the simple reason that you shouldn't be giving up more equity? Why do you think that should almost be the last option in other situations?

Steve Tingiris:
There are a number of reasons, and certainly not giving up equity is one of them. You also want to think about it from the investor perspective. As you're thinking about whether or not this is a fit, you really want it to be a fit on both sides, the win/win cliché. If you think about what an investor's interested, they're interested in their return on their capital. To an investor, it is really … That's why they're in it in most cases. You need to understand how their math works to figure out whether or not it's going to be a fit for you. As an example, sometimes when I'm talking to an entrepreneur who's interested in raising funding, they in some cases maybe really have not considered the investor's side of it. When an investor is looking at an early-stage company, for starters, early-stage investing is extremely risky. You're going to lose your money on more deals than you're going to make money on. That's just how it works.

Andy Baldacci:
Yeah, and that's almost understating it, too.

Steve Tingiris:
Yeah, yeah. There's all kinds of opinions, and certainly some investors have better returns than others, and some funds do better than others, of course, but generally speaking it's a very, very high risk, as high as it gets. I would even say it's higher risk than being an entrepreneur. I have done some angel investing but not a lot. I've done ones that I really feel good about at Florida Funders. I'm fortunate to work with a lot of other guys that are a lot more experienced on the angel side, but generally, the math goes something like if you invest in 20 companies, as an example, you'll lose your money. On a third of those, you'll break even or not lose a whole lot on a third of them, and then a third of them, you'll make something on, and a small percent, hopefully you'll make enough to make it all worth it.

The returns, after you average it all out, are maybe in the 20 to 30% range, and I think when entrepreneurs hear that investors are looking for opportunities to get like a five or a 10 time return on their money, it seems like the investors are maybe overreaching. They think, "Well, if I went to a bank even with a ridiculous rate, it might be like 18 to 20%." These guys are looking for opportunities to get a five and a 10 time return, but it's really not a five or 10 time return.

Andy Baldacci:
Right, because the distribution of those returns isn't consistent. It's not as though, all right, if I make 30% on this investment, 30% on the next one, and 20% on this, it'll average out. It's like, no, seven of these investments are going to go to zero, so you need to have higher returns on those other ones to make up for that.

Steve Tingiris:
That's exactly right. Yeah, that's exactly right. As the entrepreneur, you really need to be looking at your business. If you're thinking about raising money, you really need to be looking at your business going, "If I take on money, how does that money turn into a five or a 10 time return for investors," because they'll be thinking that way. This opens up a whole lot of, I think anyway, a whole lot of questions that as the entrepreneur you need to start asking yourself and answering. For example, if you're a single owner right now, so you own all the equity in your company, and let's say you're doing $1 million in revenue just as an example, if you were able to exit and sell your company for two or three times that, you might put a few million dollars in the bank, but if you go and raise $5 million, as an example, knowing that your investors are going to be looking for a five or a 10 times return, you're not going to be in a position to sell your business, probably until you get to like a 15, 25, to $50 million valuation.

Andy Baldacci:
Right.

Steve Tingiris:
When you get there, depending on how the deal's structured, you might not have the same kinds of returns that the investors get. They'll often be … You're looking to get at least their money back first.

Andy Baldacci:
Right, especially if there's liquidation preferences and all of that.

Steve Tingiris:
Exactly. There's a lot of the technicalities that are things that you need to consider. The devil's in the detail in a lot of these deals. Going back to your earlier question, why would an entrepreneur maybe want to think about alternative options rather than just going to seek funding, it might be in your best interest to not seek funding, not seek venture funding, if you can make it happen without outside capital.

Andy Baldacci:
Going on that, when you say make it happen without outside capital, what are the ways to do that? In my mind, I have all right, you could boot strap, you could have money from another source funding it, you could get it to the point where the profit sustain itself and slowly. Is it possible to even get a bank loan for a startup like this? What are those other options in your mind?

Steve Tingiris:
There are a lot of other options. Bank loans are one. What a lot of times … It depends on what you're raising the capital for. In a small business, very often the biggest expense is the founder or the team. If it's a small team and the capital is for paying your costs of living, your mortgage, and you got to eat and all of those things, if you are in a position where you're trying to figure the business out, you're trying to put an early-stage prototype together or trying to find product market fit, trying to understand where the need is on the customer side, if you're raising money at that point, it's really RND money almost. You don't always know that there's an opportunity to grow. In my opinion, that is the riskiest place and the most expensive place for the entrepreneur to raise money. To the extent that you can, you really want to get further down the road in my opinion before seeking capital, again, if most of the capital is really just going to be for covering your living costs as you figure the business out, that's going to be really expensive in terms of what you give up.

Andy Baldacci:
It's expensive because it's risky, right?

Steve Tingiris:
Exactly right, yeah. When you start with a concept, for example, and you got to an investor and you say, "Hey, I've got this great idea, and I need money to prove it out and make it happen. You give me $100,000," or $500,000 or whatever the number is, "And I'll give you my time and my idea, and together we'll make history," the investor's side of that is going to be, "Well, all right. What do you think your idea is worth right now," and so the valuation. You're likely going to think it's worth more than the investor's going to think it's worth. Let's just pick a number, an easy number if you need $100,000 and say, "I think right now the idea's worth $1 million." Depending on where you are and what your resume looks like and all that, you might have a million-dollar idea, but it's not often in my experience.

Andy Baldacci:
When you nothing else, when it is just that idea, the valuation, a lot of it's going to be based on the team. If you want to get a valuation like that or that early, you really need to have a ton of domain expertise and a track record showing that you can execute on this. That's to even start the conversation, I feel like.

Steve Tingiris:
For sure. If it is just a concept, it's all about your resume and your team. If you've got a track record of success, and you've had exits, and you've made investors money in the past, that's a much different scenario than if you've got this idea and all the drive and passion in the world but not proven yet. It's going to be very, very different in terms of valuation. In both cases, it's going to low relative to what it could be if it were even a little bit further down the road. If the conversation goes, "I've got this idea and I need some money to flush it out," that's a very different conversation than one that goes, "We've got a prototype or a first version of this whatever, and we've been testing it for the last few months, and we've got this number of users and this much revenue. If we had this much capital, we feel pretty sure that we could get it to this point over this period of time because of this evidence that we've gotten up to this point."

You really want to ask yourself, "Is there any way to get … " Even if you are sure that you're going to need funding, the further you can get without funding, the better off you're going to be because you'll be able to convince investors more so with evidence, like real evidence, and real evidence is, in a best case scenario, revenue, customers, you've brought some people on board, and from there it might be a product, some early traction with beta customers or something like that. The more that you have to prove your hypothesis, the better off you're going to be when you're seeking funding.

Andy Baldacci:
Right, the less uncertainty there is for the investors, the better the terms will be for you, the entrepreneur. It seems like … I'm curious. I want to talk about your experience in a minute, but before we get to that, I'm curious, if we went through this experiment where say I'm a startup founder, I'm technical so I was able to build the prototype myself. Maybe I partnered up with someone to help with the marketing the sales. Just hustling early on, and we built up something that's maybe five, 10,000 a month MRR. We're not really making much money. We're just covering our expenses, but we have that traction. At that point, would a bank give us a loan? If we do have some of those early hurdles cleared, can we just go to a bank?

Steve Tingiris:
Probably not. Banks are not into the venture business. You might personally be able to get a loan and you could use that to build your business, but I think you want to … You're going to have an investor whether you go out and get investors or not. The one investor that you're guaranteed to have is you. You're going to be investing your time and your money. While I hear people say often that entrepreneur are risk-taker, the best ones that I know take risks for sure, but they're extremely calculated risks. You want to, in my opinion as an entrepreneur, even if you're not seeking funding, you want to hedge your bet.

When you get to the point that you're so sure that you would use your own money and you would, and I'm not advocating this, but you would take out a mortgage on your house, when you get to that point that you're that sure, you're probably onto something, or you could be onto something. You really hedge your bet and make absolutely certain that the money the money that you're putting out there has the best possible chance of creating a return on your investment of both time and capital.

Andy Baldacci:
Say we're running … That profitable company is growing but we're not sure that it's going to get to something that is going to give a venture capitalist the return they're looking for, but we want to go a little quicker than we could bootstrapping. Is there a third option for what we could pursue at that point?

Steve Tingiris:
Yeah. Depending on the business, a lot of what my experience has been with is software companies, software as a service, and those types of companies. In those arenas there's licensing. If you're trying to sell a SaaS business that is, say, the SMB market, where there's small players, is there an option to sell to a bigger enterprise player for a bigger number to fund development, where maybe you need to go outside your product roadmap a little bit because you're going to customize it for one client, but what they're willing to pay to do that is going to help you fund the development of the longer-term product vision. My last company, we did exactly that. We had this idea for a marketing automation platform that we thought would be a great fit for small and medium sized businesses. We wanted to sell it with sort of a recurring revenue model of lower monthly amount, but we had four or five bigger customers where it was very, very customized. It looked very much like an enterprise sale/custom consulting or custom development. Their systems were very different than what we were selling as the …

Andy Baldacci:
Just off the shelf?

Steve Tingiris:
Yeah. It funded the SaaS platform. It took a couple of years, but we were able to … You hear the slow ramp of death. I think it's the term for SaaS companies. We were able to survive that without going out and raising a whole bunch of money, mostly because we had "our day job", which was this custom development that we were doing. They were kind of inter-related. Not everything that we're developing for our enterprise clients was stuff that we had ever intended to be part of the platform, but some of it was. It was for us a really great way of funding the company as we were building the longer-term vision.

Andy Baldacci:
Right. You almost had a consulting arm of the company.

Steve Tingiris:
That's exactly right. I've worked with and know of entrepreneurs that are doing the same thing, but they've got a day job leveraging whatever skills they have. Sometimes it's aligned with what they're trying to build, and sometimes it's not, but in both cases, it's a funding strategy. That could be waiting tables at night to make ends meet so that you're not using cash from an investor or before the company's ready to fund your living expenses.

Andy Baldacci:
What was the end result of that? Was that one of the companies that you ended up selling?

Steve Tingiris:
Yeah. The company, it's still around. It's Enthusem.com, or ProspectSmarter.com. I'm not involved anymore. I exited from the company in 2014. They're still over there growing and building it and doing a good job.

Andy Baldacci:
From your perspective, in the other companies that you sold, had you had raised money for those, or did you take a similar path?

Steve Tingiris:
I did. The first two companies that I started, I did raise some money, not a lot, but from angel investors. I was, I think, fortunate. I, in both cases, raised money from customers of the company, so I did start the bootstrap route and ended up connecting with investors that happened to be customers. That worked out pretty well, but I really … We were able to get the companies to break even in profitability pretty quickly, so we stayed the course on just building the business without necessarily trying to blow it up. We never had a plan to become a unicorn. We had a plan to build a solid, sustainable, profitable, growing business. That's what I focused on. I love the early stage personally, so once the companies got to the point where it was 20 plus employees and the business changes from a startup to something that really requires a different kind of leadership, I stepped out of the day-to-day operations and moved on to the next thing personally.

Andy Baldacci:
As a company grows, your day-to-day is going to change significantly. The problems that you're facing are different. When you have 20 employees, when you have 50 employees, you're hopefully not still worrying about that initial traction. You have to now worry about managing your team. You have to worry about hiring. You have to worry about firing. You have to worry about so many different things that maybe you just don't enjoy, or you know there are other people that would do a better job than you.

Steve Tingiris:
Yeah. I think that's exactly it. Everybody has their unique strengths and areas where they're not a strong force, and understanding where your strengths and weaknesses are and also what you really enjoy doing is, I think, important. In being an entrepreneur, there's lots of places or needs, I suppose, for strengths in lots of different places. For me personally, I tried to turn the corner a few times and become the "CEO". That is just not what I was built for, but fortunately I was able to team up with others that were very well-suited for that and got to see firsthand what it looks like. That allowed me to focus on what I enjoy doing and what I think I'm best at and helped the company grow in the right direction by having the right people with the right skills at the right times.

Andy Baldacci:
Honestly it seems to me like a lot of what you're talking about really comes down to being deliberate about what you're doing but also why. If you're not going to build … If your goal isn't to build some big unicorn, you really should strongly consider the way that you fund your business, because a lot of those ways of funding are going to be … They're not aligned with that goal. Also, there's a more practical advice of saying, "Hey, the more risk in your business model, the more expensive it will be to raise money, so if you can, find ways to get creative and push off raising that money until you can eliminate enough risk that the terms are of palpable to you." Does that seem like a reasonable summary?

Steve Tingiris:
Yeah, for sure. If you push it off, in some cases that's going to be how you get the funding as well, so not just better terms, but it might just be that you won't be fundable until you can really show that you've gotten some traction. It really is the best thing to focus on, even if you're committed to raising funding.

Andy Baldacci:
There's just so many … With all of the … I don't even know how to describe it. The startup ecosystem, the eco-chamber almost when you have Tech Crunch. When you have Silicon Valley the TV show, I know it's a bit … Obviously it's satire, but still, it describes a reality for a lot of people, where it seems like the only path to go is raising money. A lot of people raise money to avoid having to do some of that hard work early on, but in the end, it's not going to save you from any problems. At a certain point, you still need to figure out and find product market fit, and you need to get your traction, otherwise it doesn't matter how much money you have in the bank.

Steve Tingiris:
Yeah. There are some fundamentals that, to your point, have really not a lot to do with whether or not you raise money. I had a conversation last week with a company, a great, great group, and I thought a really good idea. We got to the part of the conversation where we were talking about the market and the focus on the market and I asked, "What does the competition look like, and how are you different from the competition?" The answer, "Well, our price point is a lot lower than the competition and that's how we're going to differentiate."

Their average LTV, lifetime customer value, is about $15,000, and, "We're selling a much lower price point, so ours is about $1,000, and that's our competitive advantage." Initially that might sound attractive. When we continued, I asked, "How big is the addressable market right now, like immediately? What are you looking at over the next 24 months?" The answer was, and this was a enterprise business-to-business system, but the answer was … There was 10,000 really good prospects in our target market, and immediately on the investor side of that conversation, I'm going, "Well, that's a $10 million market, and they're looking for $1 to $2 million just to flush out the idea."

Andy Baldacci:
Yeah, the math just doesn't work.

Steve Tingiris:
Yeah, it just doesn't work. You need to as the entrepreneur do that back-in-the-napkin math for yourself also, and whether you have the money or not, the market needs to be big enough. The value of the customer needs to be sufficient. The cost of acquiring a customer and how accessible the market is, those are really three big variables, how big is the market, how costly is it going to be to acquire customers and keep those customers, and what's the value of a customer.

Andy Baldacci:
Right, because not only will those things help you get better terms or better investors, whatever it is. It also is just good business sense. Those are things you should do your best to figure out first. You need to have some, not just in a business plan and not just on paper, but you need to go out there and actually try to validate some of these assumptions.

Steve Tingiris:
For sure. Yeah, if you can … If you talk to any investor, one of the questions that they're going to ask is, "What does it cost you to acquire a customer?" If your answer is 10 cents, you better be able to prove that.

Andy Baldacci:
Right. You better be the world's best pay-per-click person or just anything. Otherwise, it's just not going to work. You need to have some reality backing up these numbers. Honestly, Steve, this was a great chat. I know we could've talked about 1,000 different issues for an hour each, but we do need to wrap things up a little bit. I'm curious. For our listeners who want to hear more from you about what your company's about, any of this, where should they head?

Steve Tingiris:
DabbleLab.com. If you've got an idea and you're trying to figure out if it's something that could be fundable, if you've got a business that is up and running and looking promising, and you're seeking funding, go to FloridaFunders.com. Florida-based companies we invest in, but FloridaFunders.com/Apply, and you can go through our funding application that way, and Twitter on @DabbleLab and/or Steve@DabbleLab.com.

Andy Baldacci:
Awesome. I'll make sure to get all of that linked up in the show notes. Steve, I just want to say thanks so much for coming on today. I really appreciate it.

Steve Tingiris:
My pleasure, Andy. I appreciate the invite to be on with you today.

Andy Baldacci:
Of course.