FUNDING YOUR STARTUP THE COMPLETE GUIDE
DO YOU HAVE A FANTASTIC IDEA FOR A
STARTUP? L
et’s say you’re planning to build a new social network. Here’s some bad news: building and scaling a web app—and turning it into a real business—isn’t cheap. If you’re a developer, great! If not, you’re going to have to either a) find a technical co-founder willing to do the work for free in exchange for a chunk of the business or b) hire someone to build it. As a startup founder, you’ve got to figure out where you’re going to get the cash to get your idea off the ground. Once you’ve got a real product and a few users, you’ll also need money to scale it. This guide gives you the inside information on how other startups have turned their ideas into successful businesses and lays out a roadmap that will get you there too.
STARTUP FUNDING HAPPENS IN FOUR DISTINCT PHASES.
PHASE ONE
BY HOOK OR BY CROOK YOUR GOALS: Clearly define the problem your product will solve. Test your solution with real people to see if they’d use and pay for it. Before you ask anyone for money or invest any of your own, you need to know whether you have a business idea with profit potential. That process starts with clearly defining the specific, unmet need your product will address, and then sharing the idea with the right people. “The Lean Startup” by Eric Ries is THE resource for teaching you how to validate your idea. Regardless of how you do it, it’s going to require an investment of either of time or money, and often both.
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THE BILL: Anywhere from $0 to $100k
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WHERE TO GET THE CASH: SELF-FUND Many founders live cheap and stockpile anywhere from $10k to $50k, sometimes even more. Self-funding lets you maintain full control of your company, postpones asking other people for money, and keeps your expenses low with no loans and interest to pay. SAVE CASH AND DO IT YOURSELF If you’re a programmer, and your project is digital, building it yourself will cost you time instead of money. Do you have the time to give? Also ask yourself who’s responsible for finding customers? Sales and marketing can be as much work as getting a product released, and that’s where a nontechnical co-founder can come in handy. SHARE-GET A CO-FOUNDER Co-founders bring skills, time, and money to a startup, and they can help get you off the ground without outside financial investment. Keep in mind, they also share control and future profits. If you find a good partner who knows things and people you don’t, is willing to commit time to the idea, and has a similar endgame in mind, a co-founder might be a good fit. FRIENDS AND FAMILY Asking friends and family for money is outside most of our comfort zones. You may be surprised, however, at how quickly you can scrape together the money you need from a few enthusiastic people you already know. Friends and family already trust you, and they’re often more motivated by a desire to support you than to get their money back quickly. Think bigger than your friends’ wallets. Regardless of whether your friends have the cash, ask if they know anyone else who might. You never know who has a rich aunt, a boss, or a “friend of a friend” who’ll be willing to pony up. If you ask enough people, you’ll likely be able to raise a sufficient “seed round” to get rolling. FIND AN ANGEL Angel investors are wealthy people who invest in startups in exchange for a piece of the ownership and the excitement. To find an angel, get involved in your local startup community and ask around. You may also want to check out online sources like AngelList (Angel.co) and Gust. Angels are usually successful business people that bring insight, relationships, and credibility to your startup, as well as their checkbook. They also bring their opinions on how you should spend their money. Evaluate potential investors holistically and choose wisely. They’ll be with you for a long time.
PHASE TWO
CASH REQUIRED YOUR GOALS: Get some customers. Once you’ve built something tangible and demonstrated that it meets a real need, your idea will require significantly more effort to create a meaningful customer base. Most people think, “Once my brilliant idea is built, it will go viral.” Unfortunately, it only works like that in the movies. Most products die as soon as they’re launched because the founders run out of money from failing to plan for customer acquisition and onboarding. You need to expose people to the idea (marketing and sales) and make it easy for them to try it (onboarding). That requires additional development and time dedicated to customer acquisition. It’s hard to do all that for free.
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THE BILL: Anywhere from $50 to $250k
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WHERE TO GET THE CASH: CROWDFUNDING If you developed a fan base in Phase 1 or from a previous project, a crowdfunding campaign may work. Novel or sexy consumer products typically raise the most money on sites like Kickstarter and Indiegogo. Even if this describes your product, remember: fewer than 50 percent of companies that seek crowdfunding actually meet their goals. Failing at crowdfunding can also make it harder to raise money from investors later. Angels and VCs often feel if your idea isn’t strong enough to raise capital in the open market, it’s not a safe bet for them either. ANGELS If an angel helped get your idea off the ground, don’t be afraid to ask them for more money and have them introduce you to their friends. Angels tend to hang out with others, and this is where your existing investors’ connections can come in handy. GET A LOAN If you don’t have cash available, but are committed to self-funding, a small business loan is always an option, but a risky one. Most banks require a personal guarantee, which means that even if your business fails, you’ll still owe the money. SEED FUNDING COMPANIES Some venture capital firms like 500 Startups and Founder Collective focus specifically on seed-stage companies. Companies that offer seed funding aren’t just looking for great ideas or interesting prototypes. They’re looking for a great idea backed by a great team and clear growth potential. Now’s the time to have a business plan in order and a growing user base. Be sure you have good answers to questions like: • What is the real market for your product or service? • How likely are customers to buy your product/service? How do you know? • How are you promoting your business? • Who is your competition? How will you differentiate yourself? • What do you know about running a business, and how will you learn the rest? • What are your biggest risks, and what will you do about them?
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PROFITS FROM PHASE 1: Did you make any money during Phase I? Most startups don’t, but if you’ve been lucky enough to turn a profit, there will never be a better time to reinvest that money in the company.
PHASE THREE
IN SEARCH OF SCALE YOUR GOALS: Develop a larger user base. The name says it all—now’s the time to figure out how to take your small, growing user base and cost-effectively scale it, hopefully in a big way.
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THE BILL: Mid-to-high $100Ks to low $1 Millions
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WHERE TO GET THE CASH: CROWDFUNDING Didn’t try crowdfunding earlier in your journey? Now may be a good time, especially if you’ve built a decent-sized, enthusiastic user base. The more users, fans, followers and supporters you have to reach out to, the more likely you are to reach your goal. Be sure to develop a solid marketing plan before your campaign launches (here’s a great article to get you started). Get creative with your rewards, and be clear about how you’ll use the money. If your users aren’t truly excited about the direction you’re going with your product, they’re not going to fund it. MORE ANGELS Now that you can show significant traction, you can go back to your original angel investor(s) and ask for more money. The more buzz and growth you’ve generated, the more interested your angels will be in writing bigger checks. You can also go back to folks who said “no” before because you’ve got a proven business model now. VENTURE CAPITAL Venture capital is the Holy Grail of startup funding, but the harsh reality is that the vast majority of early-stage startups won’t get it. The average age of a company backed by a VC is four years. Younger companies that receive VC funds typically have a few things in common: 1. They can prove their business model works. 2. They can demonstrate their product or service meets a need that users have and will pay for. 3. They’re run by people with successful businesses under their belts. 4. They have a clear plan for how they’ll use the money and how it will result in growth. If your company has at least three of the four things above, VCs might be for you. If not, look for money elsewhere and focus on growing your customer base.
PHASE FOUR
GO BIG OR GO HOME YOUR GOALS: Scale. Period. If you’ve somehow managed to build a company with an exponentially growing customer and fan base, take a minute to congratulate yourself. Very few companies ever make it here. Now it’s time to go big. You’ve likely spent a lot of other people’s money, along with your own, to get here, and everyone will be getting antsy for a payday. That payday usually comes in the form of an “exit.” Your exit may come in the form of an acquisition, in which another company trades a pile of cash or stock for ownership rights, or an initial public offering (IPO), in which the general public trades a lot of small piles of cash for ownership. For an exit to work, you need to scale dramatically and make a convincing case that your company is poised for continued, explosive growth in the future.
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THE BILL: $1 Millions, $10s of Millions, or $100s of Millions
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WHERE TO GET THE CASH: SELF-FUND If you’ve managed to find a high-profit business model, and you’re pulling in a steady stream of revenue, reinvesting the profit is a great way to grow. Just make sure you’re not limiting your opportunity. If you know adding $10M to your company will return $100M, but your company only generates a $1M in profit, go find more money. VENTURE CAPITAL If you’ve made it this far, but haven’t generated enough profit to take your product to the next level, it’s time to start seeking capital from VCs. In a 2013 article for Forbes, market researcher Geri Stengel outlines some must-haves for companies seeking venture capital. They include: • • • • •
A target market of at least $1 billion. The potential for very high ROI. Substantial traction. An outstanding, well-qualified team. Personal chemistry, coachability and the potential to work well with the VC
GO STRAIGHT FOR THE IPO If your company is on fire and growing rapidly, you may be able to skip straight to an IPO. Venture capitalist Glenn Solomon lists three attributes a company must have to consider an IPO in a piece for Forbes: • Predictability and visibility. • Underlying growth potential. • Vulnerability assessment. In terms of growth potential, Solomon recommends thinking beyond the $100 million mark and having a growth plan that gets you to $300 million or more. If you’re growing fast enough and have a big market ahead of you, that should seem a likely, even easy, number to hit. If it isn’t, rethink your plans. “The IPO is not an end game,” he says. “A better analogy is that going public is more like moving from college sports to the pros.”
THE MONEY IS OUT THERE. Growing a company is hard. It also tends to be expensive. The good news is that the money is out there. Don’t let your dream die because you’re afraid to ask for it. Good ideas that solve real problems with persistent founders will get funded. Hopefully this guide will help you figure out where to find the money you need.
About Dolphin Micro, Inc. Dolphin Micro builds custom web and mobile software for startups. Learn more or sign up for weekly startup tips at http://dolphinmicro.com/startups.