Option 3: Start a business with a business model that allows you to generate revenue in month 1. It sounds like you're using the funding as a cushion to protect you from having to build a profitable business RIGHT NOW. See this article http://swombat.com/2011/12/8/investment-cushion-springboard

With option 1, you're still going to be broke, but in a year's time, or whenever your money runs out and you realise you still don't have a business that makes money.

Nothing focuses the mind on finding revenues like being broke and needing to make the rent.

(I've been there. I was broke when I started my second business. We raised funding. Three years later when we ran out, I was still broke. I am fairly convinced that if we had raised no money we would have been much more likely to succeed, since it would have forced us into tangible, serious discussions with our potential clients immediately, and forced us to learn to sell right away)

I completely disagree about "Nothing focuses the mind on finding revenues like being broke and needing to make the rent." I know that a lot of people out there believe in this "desperation leads to solution" mantra. But I don't. I work much better and I am much more focused when I don't have to worry about bills.

I started to sell my product from month 1, but wasn't able to generate revenue from month 1. I have a SaaS for restaurants, the sales cycle is longer than a month, no restaurant (around here) close deals at the end of the year - this I learned from experience, but also from successfull and experienced entrepreneurs from the same market; also advised by these successful founders I am offering a 3-month free trial for the first clients. The advice actually was "you will only charge after the 10th client, you need social proof first of all, so give your product for free and then charge after the 10th early-adopter."

So, there is no way I can be profitable before March or April. Ok, maybe I am no sales wizard, maybe I am not good enough on this founder thing. But the point for me is, I am broke, and I already started my company, and I can't make it profitable. As I can't choose option 3 "go back in time and found another business" and I am not ready to quit this business, I will take funding.

Another way to look at this situation is that in the absence of revenue, you may be kidding yourself about the viability of the business. If you can't generate any cash from it, how do you know it's a product/market fit, or that you're capable of executing on it?

You will eventually come to learn that your time is precious, and that wasting it on an idea that can't be made to work is worse than failing to make one (of many possible) viable ideas succeed.

This is something I worry, but I am still convinced it is not time yet to quit or pivot. I have 5 clients: 3 are on a 3 months free-trial, 2 are paying about $80/month, starting in January.

For some context, my product is a loyalty program for bars and restaurants based on Facebook's check-in. I talked with 50+ restaurant owners, and social proof is very important. But i also learned that no restaurant is totally satisfied with my competitors' products. I learned where I need to perform (final customer's adoption, as it is a B2B2C product). And I am testing my premises on these 5 clients. These next two months will be crucials to validate my business. I actually put a hold on sales to take good care of these clients. If in two months there are willing to pay for it and let me put their logo and cases on my marketing material, then I have a business. If not, then it is time to quit (or pivot). Either way, I still need a month or two, at least, to know if it is a good idea (or if I am good enough executing it). So I am taking this angel money to validate a promising idea. Sound exactly what angel investment is designed for.

So, there is no way I can be profitable before March or April. Not with this business, for sure. If you have a business idea that requires many months or years to get off the ground, and you don't have the resources to sustain yourself during that period, though, I'd argue the idea is out of your reach: http://swombat.com/2012/1/19/idea-reach-cofounder-myth

In your position, I would pick a different business idea.

In his current position you would advise towards starting over with different business idea from scratch. One that would generate money from day one and need zero money to start.

Yeah.. I'd say take the funding.

Or Consulting/Freelancing. It's very much possible.

I did some freelancing. A two-week job paid my November bills. It was a good emergency revenue, but it is a palliative solution. It is hard to find such jobs, it is unpredictable and also distracting.

I still prefer the angel investment.

That is what I am doing currently to support my start-up. One steady client that pays well and is willing to work with a somewhat flexible commitment from me at about 10 to 20 hour per week. And with careful spending that will pay bills for my family.

People who haven't been broke recently often forget what it is really like. I mean how can you be worried about something as ethereal as investment risk when you can't pay your bills. This is premature optimization, there is no proof of value yet. Take the money.

In a Saas, you are basically doing custom application development for your first few customers. If your customers won't pay $100 a month for that, I would be concerned about business validation.

From my experience, being desparate pushes you extra, true. But you hit a wall, since you've just spent a lot of your time chasing urgent and important instead of not urgent and important, which is preferable long-term strategy.

I could make a house building analogy here probably.

"Nothing focuses the mind on finding revenues like being broke and needing to make the rent."

Research shows that the cognitive load associated with being broke amounts to a loss of one standard deviation in IQ. The mind is focused all right: only on making the rent and on nothing else, and under no circumstances on anything like starting a business.

I've heard the same thing, but do you have a reference for this?

LMGTFY:

Anandi Mani1, Sendhil Mullainathan2, Eldar Shafir3, Jiaying Zhao4. Poverty Impedes Cognitive Function. Science 30 August 2013: Vol. 341 no. 6149 pp. 976-980 http://www.sciencemag.org/content/341/6149/976

http://www.theguardian.com/science/2013/aug/29/poverty-menta...

"Start a business with a business model that allows you to generate revenue in month 1"

It doesn't seem to me this is very realistic.

My impression is that building any kind of serious SaaS is going to be at least a 6-12 month project for a single developer.

Even ideas like blogs with affiliate marketing revenues probably take about a year to generate enough users to make sufficient money to support oneself and simple pure ad supported sites seem to require at least 100K+ users to make money (ie with RPM's around $1).

Is it really possible to start a software/online business that will earn significant revenue in 2-3 months ?

EDIT: Excluding consulting/freelance work of course.

SaaS is not the only business model out there...

It's entirely possible and very realistic. I built a SaaS product in the equivalent of about a 7-8 working days that 4 weeks in had $1000 in MRR and 8 weeks later is double that.

http://joshpigford.com/baremetrics-stripe-analytics

It's about solving problems that businesses are willing to pay for. Doesn't matter how good the idea sounds. Only matters if businesses will fork over real, tangible money for the problem you're solving.

"Nothing focuses the mind on finding revenues..."

So I spent months attempting to chase revenue (i.e. looking for the next thing that might make money now ...) instead of building the business I wanted.

  Nothing focuses the mind on finding revenues like being broke and needing to make the rent.

True. That's why I found an angel. It's easier than build a business. One step at a time.

"Start a business with a business model that allows you to generate revenue in month 1."

Funding is for companies who want to be big/great. Most big/great opportunities have a cash-intensive front-end that scares away most entrepreneurs. It's not a "cushion" - it's a MOAT. Funding is the boat that gets you across it. There are certainly exceptions, but I don't think it's fair to assume he's "using funding as a cushion".

I've noticed a few people say they've just gone out and found an angel instead of working freelancing/etc. during development. Out of curiosity - how do people go about this? Do you meet people through your existing contacts? Do you search on the internet? Do angels generally need to be people in the same country?

Angels are - almost by definition - very personal relationships. As such, I would think that most angel investments are done through your network.