Legal tech startups don’t need investors

Read a story about a legal tech startup and you’re apt to read that they’ve raised venture capital or are about to do so.

In the vast majority of cases, venture capital is no sign of success — nor needed.

Jason Fried (@jasonfried), co-founder of Basecamp, wrote last week that most successful businesses don’t need venture capital to stay afloat.

…[I’t’s] basically like living in their parent’s basement. They haven’t had to go and make their own living yet.

Launching a tech startup is not nearly as expensive today as it was fifteen years ago. You don’t need a lot of developers, data base people and system aministrators. Much of what these folks did back then is now available in software or services available for free or at minimal cost. AWS and other cloud providers make hosting cheap.

Sure, you may need development and design work needed. That can come in the form of sweat equity from you or friends. In some cases you’ll need to pay for services or bring in a “partner.”

Extend your existing income and benefits as long as possible, ideally until your startup is afloat. You and any partners can keep your day jobs while working on the startup on nights and weekends.

Save all the money you can. As you consider cutting back on your job or quiting altogether, a spouse or partner (who’s a saint) is awful nice to have for income and benefits. And of course, you all live cheap, even as a family.

Demonstrate you have a real product. This means getting people to take money out of their pocket and put it in your pocket.

Customers will help you develop a product that’s of value to people and one that will sell. Paying customers, more than anyone else, will be vested in your success. Customers will get you pumped – “I built something that others will actually buy.”

You need not have a lot of customers, one may be enough. I knew I had a product with LexBlog when a law firm agreed to pay $200 a month. After a year, I had seven customers paying me that.

Having no investors limits your spending. You won’t be hiring people you may not need, traveling to conferences you need not attend, marketing a product that’s not proven or buying equipment you can do without.

In the time it takes to find investors, assuming you’re successful in finding any, you could be working on your product.

Many startups talk of venture capital. That’s unrealistic, except in the rare case where you’re looking to go public or garner a large market share.

Venture capital, by my definition, is for all practical purposes, institutional money. Venture capitalists raise money from others, hundreds of millions dollars, in rounds of investment. The money invested with the better venture capitalists will come, in part, from pension funds and large organizational investors.

Venture capitalists invest in enterprises with a strong team and that will offer a big return – North of ten times. VC’s will be looking to invest a significant sum – enough to babysit with board members and advisors.

Procuring and managing investments in smaller sums from a good number of people is no easy chore either. A lot of time, legal fees and juggling other’s views.

Once you’ve generated some sales and can see you’ve got something real you may need to hire some people and incur some expenses. Look to debt to fund you.

I used credit cards to first fund LexBlog and a previous company. In LexBlog’s case, we never hired another employee until the credit cards had a zero balance. At times I ran them up to over $50,000.

Once your business can demonstrate it can cash flow a loan, head to a small bank. Yes, you will need to sign a guaranty and yes, you’ll need some collateral – second mortgage on your home or a lien on your non 401k/pension savings.

Small banks are looking to make loans and will lend you $25,000 to $250,000 or more. Small banks are also good financial partners to have in that they’ll be looking to see that you’re running your business prudently — something I’ve found helpful with all the crazy business models out there.

Going into debt and pledging your own assets is scary. But as my best friend, a small town banker in Wisconsin told me, “The bank isn’t looking for you to pledge your assets, they are looking to see how confident you are in your business. How confident are you?”

Sure, there are exceptions to the need for raising capital from investors. Pinching pennies, holding two jobs and borrowing money may not work for everyone.

If you can pull it off though, there’s nothing more rewarding for you and your family than knowing you’ve built something from scratch — the old fashioned way.