Starting a company is a giant science experiment. We develop a series of hypotheses and test them in as controlled a way as possible, making changes to the hypotheses as we go.
Generally, those hypotheses fall under a number of basic categories:
- Product X solves ______ problem.
- Product X has ________ customers.
- Product X will make money by ______.
- and so on.
If a company is successful in answering these questions, they tend to grow big. And those that can’t answer the basic ones don’t grow at all (or very little).
In the 12+ years I’ve run Infinity Softworks, I’ve observed more than a few stupid ideas get a ridiculous amount of money. I thought large amounts of funding at an early stage of a company’s life — even $500,000-$2 million — was the wrong approach. Too many companies spent beyond their means or used it to grow a business before they knew what business they were in.
But I now believe I was wrong. Early stage funding is not intended to grow the business; it’s intended to answer the hypotheses. And by focusing on answering the hypotheses, it positions the company for growth.
So how much money does a company need? The answer is enough money to run the hypotheses and prove that there’s a business that deserves more funding (or can grow from revenues). I underfunded Infinity Softworks with our latest endeavor with web, iPhone and FastFigures, and put ourselves in an interesting position as our first hypotheses proved false.
This leads to obvious second question: where does the money come from? Is it internally funded or does a company raise capital from angels and VCs and others? That answer is it depends. I have a good friend who runs Creative Algorithms, a husband and wife team creating apps for smartphones. They’re able to run their hypotheses out of their own pocket and, given the size of the business they are trying to grow, it wouldn’t make sense to raise funds. I, on the other hand, raised funds. The size of the experiments — coupled with the business potential — required it.