March 12, 2020

Self Funded - A Primer In Knowing Why

You may see businesses talking about being self-funded. What does that mean? An obvious first answer is that it’s moral signaling: “I believe in my business enough to put my money where my mouth is, so you can trust my motives are pure.”

That’s usually true, although it can be heavily effected by the ratio of money to start the business vs the net worth of the founders.

There’s a difference between a millionaire putting in $15k to start up a business, and regular people like Lee & I are our first partner, Dave, all putting in $5k each. At the time, that money represented about 80% of all available funds for Lee and I. It may have been a little less percentage for Dave, but it certainly wasn’t money that any of us could easily afford to lose.

Investors and money managers would probably tell you it’s stupid to invest 80% of your liquid assets into a business that may or may not succeed. That’s fine for Lee & I, we have an especially large appetite for risk coupled with a belief in self that’s a perfect fit for this kind of thing.

Let’s talk about that belief in self. Moral signaling isn’t the only reason to talk about being self funded. The more important thing is why anyone would actually self fund, whether or not they talk about it publicly.

The majority of being self funded runs around being self aware.

You have to know:

-what you want
-what you don’t want
-what your limits are
-what makes you happy.

For Lee & I, the answers to those questions clearly point to us having to be self funded.

Let’s start with what we want. Our basic want is freedom to do things our way.

That encompasses an entire world of choices; having the money to do it, having the belief in self to try things a different way than the norm, having the confidence to believe we could be right even if conventional wisdom says we’ll be wrong, and having the stubbornness to pick ourselves back up when we are wrong and face the facts of sometimes not getting it right. We want and love that freedom.

We also know what we don’t want.

We intensely dislike (in most cases) being told what to do. We are also generally mistrustful of complex deals where everything needs to be spelled out. Here’s how that applies to being self funded and not getting money from investors:

We don’t have the sophistication or the interest to deal with investors. Let’s talk about those two things separately.

When it comes to investors, sophistication really just means specialization in understanding all the details of the trade between investor money and a stake in your company. Lee & I realized pretty early on that specializing in understanding those details wasn’t something we wanted to do.

That means that a door of opportunity to scale the company with other people’s money closes for us. We’re fine with that. As I’ve said before in other places, if we were solely driven by money I’d be trading slaves for cocaine and offering credit on unsavory terms.

The second aspect of dealing with investors involves dealing with what they want. We know that if we take investors on board, we’ll be forced to change our business. There’s no question about this, even though every investor you meet will say, “I just want to help you grow your business, you can keep doing what you’re doing.” That’s bullshit. If it were true, you wouldn’t need an investor.

Investors want a payback, which means they need to do one of two things, or both. Both of those things address our third point of self-awareness, which is knowing your limits.

Investors need to make sure you make more money by reaching a wider audience and increasing overall sales. They can do that by throwing money at marketing, or by changing how you market. Sometimes those are easy and excellent ways to improve sales, but most times it means appealing to customers you purposely avoided before because you didn’t want to change your product to accommodate them. An example of this would be us gearing down to just being gluten free instead of being Paleo, which goes far beyond gluten free.

You have to expand your limits of what’s acceptable in order to accommodate meeting investor goals.

Second, investors need to ratchet up your profit margin. There’s not a great way to make high quality ingredients cheaper. I’m not saying you can’t ever do it, just that there’s not usually a *good* way to do it.

This relates again to expanding your limits of what’s right and wrong. The reason high quality stuff costs more in most cases is because it takes more time and effort to produce. As an example, diced organic unsulphured apricots cost more than diced conventional apricots coated in rice flour; it is WAY easier to dice apricots once the stickiness has been absorbed by the rice flour. For most people, they don’t give a shit, they just want the cheapest product that mostly satisfies their needs. We give a shit, and we make sure that our ingredients meet our needs. That’s a limit we won’t push beyond.

With investors, you’ll be forced to cut costs and widen your audience. Investors want your business to make more money than it’s making in order to get their money back. They’re not investing in your company because they want to waste money. It’s almost a guarantee you’ll be forced to push past limits you may not want to. Knowing your limits is an important part of deciding whether or not you want to be self-funded.

The fourth aspect of self-awareness revolves around what makes you happy. Obviously, money is a factor in happiness if you want freedom, since money buys freedom. Still, there’s a wealth to agency that goes beyond money. Knowing that I can go fly my paraglider right now if the weather is perfect, or that Lee can go do her art, or that together we can drive out into the desert and visit Jacques Istel at the Center of the World without asking anyone permission; all those choices are worth the cost to us of not having an investor and access to a ton of money.

It makes Lee & I incredibly happy to pursue creativity. Creativity usually involves risk. Investors don’t like risk, especially when what you’re risking is their money. If we weren’t self-funded we wouldn’t have that ability to take so many risks.

The flip side is that many of those risks haven’t panned out, which means we can become uncomfortably limited in what we can do.

Still, Lee and I love the risks and rewards. We love knowing what we could lose and what we might gain. Most of all, we love knowing that we’re doing things the way we want to do them. We are free in the way that is most important to us to be free.

That, at the core, is why we’re self funded.

 

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Nik Hawks

Author

Nik Hawks helps run the show at Paleo Treats. Fascinated by humans in all their strange glory, Nik is harnessed in and pulling hard in pursuit of excellence with the rest of the PT Crew. Enjoy!


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