Thanks for the advice! I'm an avid reader of your blog, so it's cool to get feedback from someone I admire in this industry.
A lot of the comments here are bringing up the question of if and _why_ we need to raise funding, which has been something we've asked ourselves (and are asking ourselves even more in light of these comments). Essentially it's a combination of necessity and validation. We're college students ourselves and we realized early on that the only way we're going to be able to make this business successful is if we treat it as a full-time job and throw everything we have at it. We all quit our actual jobs because the website needed the focus, and that isn't a sustainable path for much longer, even if we do have a couple thousand dollars revenue in the business bank account. However, I definitely have to disagree with you that this should lead us to consider closing up shop, just because we personally don't have enough funds to continue running this out of pocket until it can run itself doesn't mean the business doesn't have potential and should be abandoned.
Choosing Door #1 while continuing to knock on Door #3 has always pretty much been the plan, we just don't know where to find the investors for Door #3 and that was what led me to posting here. I didn't really expect it to get so much attention, haha.
And a lot of people are critiquing our business plan/strategies--which I am grateful for and do actually appreciate--but I didn't really intend for this to be an elaboration of our business and I didn't really write my OP in order to explain how everything works and what all our financials/projections are, rather I wanted advice about moving forward from here. Yes we can keep doing the same thing we're doing and slowly build (and that's what we're going to be doing), but we don't think it's unreasonable, as a tech startup, to be seeking some sort of funding in order to grow faster and more efficiently.
We're actually using some of the money we've made to hire someone to come over to our house for 15 hours a week and sit on Skype and find/maintain the property listings in our database, as that's the most menial and time-consuming bottleneck we've identified. That way we can continue to focus on product dev and sales instead of having to devote a good chunk of every day to making sure the website is up to date. This should free up enough time for the three of us to take on another school, and just keep doing what we're doing.
Thanks again for the advice!
Sean
In order to properly provide advice about the next steps, this context is necessary. If it is costing you $10,000/month to pull in $500/month revenue, then you must begin to consider its viability in its present form and come up with a different revenue model before you go from broke college students to indebted college students.
It sounds like you have already made up your minds about the way you want to go. I would recommend really reading all of the commentary here, because these are all questions that anybody with any money is going to ask, so you should have good answers.
Think about it - whats the worst that can happen you have to go back to school? You can't get a job? Bullshit this is your resume and your education - trust yourself and go for it.
Basically, don't drop out of college just because someone on the internet tells you to, think it through.
If you get into YC and it looks possible to raise a big round, then it might be time to start thinking about dropping out more seriously.
Strongly, strongly, strongly disagree with this. The only balance you should ever run on your credit card is $0. Treat it as cash.
In what sense? Unsecured credit has the absolute highest interest rates, especially for college students. They are no doubt the most convenient, but cheapest is a bit of a stretch.
If they need the money to finance operations, then their model is wrong. Never borrow against a credit card for operations, only for AR because of the crazy interest. Otherwise, you end up without sales and large debt. Ask mom and dad, grandma, you uncle, friends if the goal is not not give up equity but you need cash for a longer term investment in the company.
I'd say that at this stage of the game, paying some interest is probably much cheaper than giving up a stake of the business. Not least because paying interest is really annoying and will teach you to make better decisions for cash flow, which will better equip you as the business grows and you do consider paths 2 or 3.
Disclaimer: I'm im Australia, it does seem like credit cards don't hate students as much here. We were all approved for decent credit while studying and it's the main reason our startup is going strong on path 1.
Credit card is one of the most expensive credits available. Economics 101. If you need a loan go to the manager and talk to them, this is cheaper.
"I'd say that at this stage of the game, paying some interest is probably much cheaper than giving up a stake of the business"
Any percentage of zero is zero. If the company goes down, it doesn't matter if you kept 80% or 50% or less, it is worth zero. 100% or zero is zero in the same way. Yes, people have to take care when selling equity, but investors are not only there for the money but also connections and advice.
Our database is the sum of all properties currently on the market that are willing to rent to college students, and that number is small. It is a very competitive, fast-paced market, and that's the reason there is a problem in this space in the first place.
From our experience cold-calling properties, 3 out of 5 rental properties are completely unwilling to rent to college students. Many will just hang up the phone. From the already small number of desirable (i.e. close to campus, not absurdly expensive, etc.) rental properties on the market at any given time, only about 40% are willing to rent to students. But we add new properties to the site daily, so our inventory is constantly cycling.
With regard to our pricing, it's something we came up with last week, and we fully expect it to be increased if our current successes in sales justify it. We have additional monetization strategies in development as well--a $1000 ad is not the be-all end-all of our revenue stream. But hell, at this point we're just excited that someone is willing to pay for this thing we've invested our lives into over the past few months.
You don't need to apply or be approved by anyone you already have access to the funding.
Cracking this particular market without a super motivated and nicely paid phone force is really difficult. SMB are hard to get on the phone and to pitch. Over the long term of course. Anything short term is possible. I've been in this market and even purchased a company that did this where the previous owner moved out of town [1] and specifically said "you can't do this type of selling remote you have to be physically in their face".
Others have done this of course but iirc they tended to be well funded and able to lose a ton of money gaining sales. (Groupon).
[1] My point being he wouldn't have sold the company if it could be operated remote and that had in fact been tried by previous owners. (This was advertising to reiterate in a printed publication).
1) You currently have approximately $500 to $2k in revenue. That's great, because it is $500 to $2k in revenue more than the vast majority of people will ever achieve. You need to work the numbers on whether the founding team can solo-close $100k in revenue in the next twelve months.
If that appears achievable, you tighten your belts, perhaps run up larger balances on your credit cards than usual, and start solo-closing every business you can find locally. You'll spend approximately 95% of your effort in the short term on ad sales and 5% on everything else. After you can consistently keep the lights on, you're going to hire a bunch of folks who will do that job to your script on the telephone all day, every day. They will be the heart of your business. They will always be the heart of your business, for values of "always" which map to "as long as you primarily keep the lights on by convincing local businesses to buy advertising."
There is a reasonably achievable path to you having a business here which closely resembles a well-run local newspaper (except you'll potentially have nationwide reach): millions of revenue, ~20% margins, etc. Much like local newspapers, it may be a not-quite-straightforward proposition to confidently say "The people who pay us get great value for their advertising spend."
If your team cannot reasonably solo-close $100k in revenue by repeating your current model, which I allocate a very non-trivial percentage of the probability space to, you do not actually have a revenue model yet. I'd have a hard look at my bank account and say "Can we figure out a revenue model before I get thrown out of my apartment for non-payment of rent?" If not, you may consider winding down the business. There is no shame in this and, while you may think your current level of success is a once-in-a-lifetime opportunity, if you hypothetically believe that I would take the other side of that bet.
2) You have a very compelling pitch for getting into YC, 500 Startups, or another incubator. You have actually shipped a software product. You won't believe me when I tell you, but many, many people who you might think are better fits for incubators cannot actually ship a software product. You have also successfully demonstrated hustle, by being able to walk into a furniture store and ask them for money, which is something which is lamentably rare among people who are capable of actually shipping software products. The combination of shipping and hustle is pretty much exactly what incubators look for.
This is a straightforward pathway into Door #3, in case executing on Door #3 doesn't sound straightforward to you.
3) You have all the elements necessary for raising a small seed round. You make an AngelList profile and curate it diligently. You approach a few investors privately, show them your stats and paint a rosy picture of the future ("We've potentially got Groupon's growth trajectory ahead of us! [+]"), and secure, say, three to four commitments of $25k each. You start to trend on AngelList and fill out the rest of the round, probably for $250 to $500k. (I'm unaware of what the Going Rate is for valuations at the moment -- probably mid single digit millions but ask someone who does this professionally to fill you in there.) You bump yourself up to greater-than-subsistence salaries, hire three or four people who are young and hungry, and aim to sustain those growth rates for the next 8 to 12 months. If you do, you will sail easily to Series A, on your way to creating an rather large business which may or may not resemble the one you are presently running. If you don't, your company implodes.
[+] "Patrick, is that a good thing?" None of the seed stage investors in Groupon are cursing their name right now. To put it mildly.