Get Your Big Idea Funded: Your Guide to the Funding Ecosystem

GET YOUR BIG IDEA FUNDED: Your Guide to the Funding Ecosystem

By Varelie Croes

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GET YOUR BIG IDEA FUNDED: Your Guide to the Funding Ecosystem

If you downloaded this guide, you’re likely in the throes of starting a new business and need funding to bring your innovative product or idea to market. Unfortunately (or fortunately), there is no holy-grail solution to startup fundraising. The answer is and always will be with the entrepreneur. Only you, the entrepreneur, are in control of your idea and how to get it funded.

In a way though, isn’t this comforting? Doesn’t it make your idea, your new business, that much more thrilling and exciting?

Every business is unique. What works for one startup doesn’t necessarily work for another.

Success lies in knowing what approach to take for your business.

This guide is designed to deliver a breakdown of the funding ecosystem so you can make the best possible decisions when it comes to funding your big idea.

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DO YOU REALLY NEED FUNDING Because it’s always a trade-off, ask yourself whether you truly need funding. Factors to consider include: • Your business model • Your unique circumstances • How fast you plan to take your idea to market I am willing to bet that thing that drew you to entrepreneurship was the freedom to create and do things your way. Accepting outside investment will mean you’ll trade away some of that freedom. You’ll likely give up partial control, and have investors to answer to.

On the flip side, bringing the right investors to the table could open doors that you never knew existed and get you exactly where you want to go in unexpected ways.

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WHERE IS THE MONEY? THE STARTUP FUNDING ECOSYSTEM

TEST OUT YOUR IDEA WITH

YOUR BIG IDEA

• FRIENDS & FAMILY • POTENTIAL CUSTOMERS

• Rewards based crowdfunding ( More popular at this stage ) • Equity crowdfunding

BOOTSTRAP • ENTREPRENEURS SAVINGS • FRIENDS & FAMILY

If bootstrapping Is not sufficient to develop A working prototype or Minimum viable product (MVP), consider Outside funding.

FIRST TIER OF OUTSIDE FUNDING

CROWDFUNDING

YOUR FIRST $$$

How to navigate the world of early-stage funding

INCUBATOR/ACCELERATOR

LOCAL OPPORTUNITIES

Some big names include: Tech-stars, y combinator, 500 Startups

• Business plan competitions • Local initiatives & government Grants • Strategic partnerships

MICRO-FINANCE • Affordable business loans (E.g., Elizabeth street capitAl) • Peer 2 peER lending

MVP OR PROTOTYPE Develop a minimum viable product (MVP) or working prototype

ANGEL INVESTORS Raise your seed round $150K-2 million

ONCE YOU’VE REACHED CRITICAL MILESTONES

VENTURE CAPITAL Series A round $2-4 million

POP THE BOTTLES!!!!

GEAR UP FOR GROWTH AS YOU REACH CRITICAL MILESTONES RAISE SERIES B & C

Liquidity EVENT Most common being : Sale or IPO

AND GET READY FOR YOUR NEXT BIG IDEA

BY: WANDERSTART - WHERE VALUES MATTER AS MUCH AS VALUATION http://www.wanderstart.com/

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If you do decide to pursue funding, here’s a breakdown of the possibilities for raising capital:

BOOTSTRAPPING “I only hope that we never lose sight of one thing - that it all began with a mouse” - Walt Disney Many businesses don’t raise any outside funding in the early years (or ever). If you’re one of these - you’re one of the fortunate few!

Chris Guillebeau, author of, The $100 Startup discusses two important business principles in his book that are valuable to would-be bootstrappers: • A business should always focus on profit.

• Borrowing money or investing a lot of money to start a business is completely optional.

Bootstrapping is appealing because you remain in full control of your business. The best piece of advice I ever received on funding is, “don’t seek outside funding if you don’t need it.” It’s as simple as that.

There’s a reason you’ve heard the “we started off in a garage” story more than once. Many successful startups started small and were funded using an entrepreneur’s personal savings or money from friends and family.

Bonus tip: Be professional about friends and family that invest in your startup. It is best to consult a startup lawyer to evaluate the options and ensure the investments of those closest to you are protected by formal agreements and appropriate valuations.

As long as you have a safe runway, bootstrapping your startup and reinvesting profits into the business as you grow can be the smartest decision. You can develop proof-of-concept as your idea evolves. Bootstrapping at the beginning helps you demonstrate to investors that you can handle money and are invested in the success of your venture.

When evaluating whether to bootstrap, you need to figure out if you’re one of those businesses that can truly afford it or whether it will hurt you in the long run (e.g. prevent the company from scaling).

Remember, VC funding doesn’t necessarily epitomize success. Sophia Amoruso (CEO of Nasty Gal and author of #GIRLBOSS, a rags to riches story) didn’t bring in VC funding until she had a thriving scalable business. In fact, she was making millions before even talking to investors.

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VENTURE CAPITAL If you’ve downloaded this guide, you likely use Google, Facebook or Twitter. All these global powerhouses are venture-backed. If it wasn’t for VC funding, these social media platforms wouldn’t exist, or at least not in their current form.

A Venture Capitalist (“VC”) is an investor (or group of investors) who is in the business of investing other people’s money for profit. The money is pooled together in a fund (“VC Fund”), which typically is the vehicle that makes the actual investments. The VC Fund invests in early-stage, high-potential, startup companies. VCs typically come in after the seed round of funding (i.e., first round of capital typically raised from Angel investors) and look to get their investment back plus a big profit through a liquidity event, such as a sale of the company or Initial Public Offering (IPO).

Your personal motivations will impact whether you seek venture funding. Taking VC money doesn’t mean you need to sell your soul. You can secure VC funding (also referred to as “smart money” depending on the particular VC) and do good in the world. In many cases, real change is driven by real investments and smart money.

Venture-backed startups are making a positive global impact. They’re encouraging innovation and creating wealth all over the world. From Beijing to New York, and lots of places in between, VC hubs are growing in major cities.

DUBLIN TORONTO SILICON VALLEY SOCAL

BOSTON NEW YORK

AMSTERDAM LONDON BEIJING

LISBON TEL AVIV

BANGALORE BOGOTA NAIROBI

Jeffrey Bussgang has a great perspective on the entrepreneur’s mind and what makes it great:

“The money is nice and appreciated, but, as mentioned before, it’s almost never about the money. It’s about passion, following a dream, and changing the world (with plenty of craziness along the way). And to help them along with advice and capital, many entrepreneurs turn to the venture capitalist.” - Mastering the VC Game 7 www.wanderstart.com

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What do Venture Capitalists Want?

“We VCs love to invest in the serial entrepreneur who’s done it before, knows the playbook, and won’t make any of the rookie mistakes…” - Fred Wilson, Union Square in Mastering the VC Game by Jeffrey Bussgang • They want to hear great stories and invest in hot new businesses.

• VCs want to back entrepreneurial teams that can effectively execute on a big vision and bring it to life.

• Many VCs prefer enthusiastic founders who are incredibly sharp and knowledgeable.

• They want you to do your homework before reaching out. Research what kinds of deals are in their sweet spot to determine if a given VC is the right fit for you.

• VCs will typically want to take a seat on your company’s board. The board is the ultimate decision maker on high-level business strategy and policy matters but isn’t involved in the day-to-day operations.

Venture Capital Highlights • VCs are incredibly selective and invest on average in one out of every 300 startups they are exposed to.

• VCs have a fiduciary obligation to their investors and therefore want to see returns fast.

• The relationship between a VC and an entrepreneur often goes far beyond the money. VCs can be sage counselors (i.e., the “smart money” concept) and open many doors.

• VCs typically invest in early-stage deals in the range of $2 - 4 million.

Note: This guide doesn’t cover Private Equity because this type of investor isn’t very active in the early-stage startup arena. Private Equity investors typically invest in established under-valued businesses that have been around for a couple of years.

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ANGEL INVESTORS The main difference between an Angel investor (“Angel”) and a Venture Capitalist is the source of money and the amount they invest. Angels invest their own money and VCs invest the money that their fund (i.e., investment firm) raises from other investors.

While asking for seed capital from Angels may sound less intimidating than asking for it from Venture Capitalists, you need to realize that in many cases Angels are in it for the money. Angels are also motivated to invest by more personal reasons and many invest because they genuinely want to contribute to the startup ecosystem.

Angel Investor Highlights • Angels are high net-worth individuals, designated as “accredited investors” in the US. • Some, known as Super Angels, invest significant amounts over the course of a year (Tim Ferriss, a well-known Super Angel, has invested in some of the hottest tech startups in Silicon Valley, including big ticket names like Twitter, Facebook, Evernote, and Uber).

• Certain Angel groups are less concerned about making money than they are about helping entrepreneurs and contributing to the startup ecosystem. Others operate more like VCs. • Unlike VCs, Angels may not require a seat on your board.

• On average, Angels provide $25 billion of seed capital every year to early-stage startups.

• Investment amounts are generally smaller than VCs (typical range is $150,000 - $2 million).

• They require a simpler due diligence process.

• The Angel’s goal is to make 5 to 10 times their investment and exit in 3 to 5 years.

Great examples of Angel investing are the businesses funded by the Sharks (investors) on the ABC hit television show Shark Tank.

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Angel Syndicates AngelList is a crowdfunding portal with a built in syndicate feature to streamline the fundraising process – making it attractive to both startups and Angels.

The portal allows a trusted Angel (or Super Angel) with a proven track record (i.e., demonstrated ability to find and fund good startups) to gather other Angel friends to piggyback on his or her deals. AngelList manages the administrative details and back-end paperwork. For Super Angels like Tim Ferris (famous blogger and author of The 4 Hour Workweek) with a strong following, the appeal is that it’s easier and faster to form an AngelList Syndicate online than to set up a VC or a seed fund.

Bonus Tip: When you are presented with the opportunity to choose between smart or value money (i.e., more money), smart money typically wins. Angels or VCs can bring years of experience and their network to the table.

Getting a higher valuation should be a secondary factor in choosing which Angel or VC to work with if they bring significant smart money to the table.

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INCUBATORS AND ACCELERATORS These days the terms “Incubator” and “Accelerator” are used interchangeably. Many Incubators now follow the Accelerator model, further blurring the line between the two.

Historically, if you join an Incubator, you typically become part of a co-working community (or central work space) with other startups, for as long as you want, without having to follow a structured program.

Accelerators, on the other hand, are structured more like education programs. Participating startups are required to follow a structured curriculum. The startups graduate at the end of a fixed period (typically 3 to 4 months) and have to pitch their idea to investors.

Incubators and Accelerators Highlights • Most Incubators or Accelerators take between 6 - 10% equity and some may require you to temporarily relocate to their operating location.

• Initial funding quantities are typically in the neighborhood of $20,000.

• The programs last for 3 to 4 months on average.

• There’s a very strict admissions process and on average less than 5% of applications are accepted.

• The programs tend to look for winning teams with a mixture of different skill sets (ideally a business person and a technical person) rather than solo entrepreneurs.

• Participants get technical, business, and legal support as they enter the startup ecosystem.

• A recent trend is the rise of themed Accelerators or Incubators, creating a more specialized environment.

Check out www.f6s.com for a comprehensive overview of Accelerators and Incubators around the world.

Popular programs include Y-Combinator (who funded Airbnb, Hipmunk, and Reddit), TechStars, and The LAUNCH Incubator. The top programs work intensely with participants to get them ready for their pitch to investors on Demo Day (i.e., the culmination of the program).

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CROWDFUNDING Crowdfunding is the practice of funding a project or venture by raising money via contributions from a large number of people, typically via the Internet. It is appealing because it falls outside traditional methods of fundraising and can save the entrepreneur time if done right. Crowdfunding sites (i.e., portals) have become a valuable tool for entrepreneurs to build their brand.

Crowdfunding is an inexpensive (in some cases free) testing ground for your idea, and for spreading your story.

If done right, a crowdfunding campaign can create momentum and organic buzz for your startup and accelerate connections with investors.

“Crowdfunding is something every entrepreneur should look into, no matter what type of business they’re starting. It is the new frontier of financing.” - Barbara Corcoran, Angel Investor and Shark on ABC’s Shark Tank There are two types of crowdfunding platforms available to startups: 1. Rewards-Based Crowdfunding - the crowd contributes money in exchange for rewards or incentives (e.g. a gift or the opportunity to pre-order a product).

2. Equity Crowdfunding - the crowd (i.e., accredited investors) contributes money in exchange for equity in the business.

Rewards-Based Crowdfunding Highlights • Most crowdfunding sites, like Kickstarter or Indiegogo (donation sites), charge a percentage (5% on average) of the amount raised.

• Kickstarter applies an “all or nothing” approach. You set a financial target for your campaign and you don’t reach it you don’t get any money (and your investors or backers get their money back).

• Indiegogo lets you keep the money you raise even if you don’t meet your funding goal. The catch, of course, is a higher fee (up to 9% on average).

• Rewards-Based crowdfunding has traditionally worked well for creative types, like artists, writers, and movie producers. These days, success in crowdfunding has expanded into pretty much all products and industries.

• One of the most common crowdfunding pitfalls is the lack of a compelling video that tells a product’s story and hooks the viewer right away.

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Rewards-Based Crowdfunding Success Story: The Million Dollar Cooler The Coolest Cooler (a multi-functional cooler that even blends cocktails) crowdfunding campaign raised over $13 million, making it the highest grossing project ever on Kickstarter. I closely followed The Coolest Cooler as a backer, and their entire campaign was seamless and polished from branding to copy.

The Coolest Cooler had a clear value proposition and their video hooked viewers because they pulled us into a clear experience of what it would feel like to own the product. What made it even more of a success was that their backers became their evangelists, building buzz around the product and helping the campaign to go viral similar to what Malcolm Gladwell talks about in The Tipping Point.

Equity Crowdfunding Highlights Crowdfunding reached a new dimension when the JOBS Act was signed into law in 2012. The JOBS Act is a revolutionary development in the early-stage funding ecosystem that enables startups to receive funding from accredited investors outside the traditional VC circles.

Once the long-awaited Title III portion of the JOBS Act gets released, it is expected that many new crowdfunding portals will be created in the next couple of years - opening up further fundraising opportunities for entrepreneurs.

Crowdfunding Risks and Challenges Once you pitch your idea on a crowdfunding portal, you expose yourself and your idea to public scrutiny.

Therefore, it is crucial to carefully research and map out all elements of your business model before you consider crowdfunding, much as you would if you planned to pitch to a VC or Angel.

If the crowd loves your idea, it can create a viral effect. But if the crowd doesn’t back your idea, it may bring up questions or red flags if you later pitch that same idea to a VC or Angel.

Equity crowdfunding, as with any new legislation, also comes with challenges. Equity crowdfunding involves the sale of securities, which means that regulatory requirements can be far-reaching. Further, the issuer, (i.e., the entrepreneur), is subject to extensive disclosure requirements and restrictions. It is therefore crucial that you understand the rules of equity crowdfunding before you move ahead and create a profile on a crowdfunding portal.

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LOCAL OPPORTUNITIES AND STRATEGIC INVESTMENTS It’s easy to miss fundraising opportunities that exist right under your nose in your home city or state. Many local organizations are standing by to hand out “free money” (the no-strings-attached kind) if the right entrepreneur comes along. Although it requires work and preparation, the threshold to getting access to this pool of money can be much lower than in more crowded places like Accelerators.

Granted, getting a little help from local organizations isn’t always sexy as it typically doesn’t involve large amounts.

Think of it this way: “I don’t want your no-strings-attached money,” said no entrepreneur ever.

Of course, do your research to make sure there’s no monkey business and you’re not going to be paying back double later.

Some local possibilities to explore include: • Local meetups and business associations.

• Business plan competitions (e.g., CourseHorse won $75,000 at the 2010-2011 NYU New Venture business plan competition).

• Co-working communities.

• Economic development agencies (e.g., StartupNY).

• Government grants and state initiatives (e.g., the Small Business Innovation Research Program in the U.S.).

Another trend worth considering is to partner with an established organization. Choose an organization that is looking to expand its horizons by tapping into the startup ecosystem and investing in innovation (i.e., strategic investments). This type of funding is typically available for startups with a proven track record.

This usually happens between tech startups and a corporation that wants the new technology or process being developed. A good example is the Quirky - GE partnership. Together, Quirky and GE are changing the face of innovation by allowing individuals to submit ideas for consumer products, while a team designs and manufactures them for retail.

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PRODUCT LAUNCH Another method for raising capital for your product is an online Product Launch (e.g., selling and promoting your product through your own website). The benefits of a successful Product Launch are similar to those of a successful crowdfunding strategy.

As with rewards based crowdfunding, a Product Launch allows you to preserve full control, because you don’t have to give up ownership to investors. Unlike equity crowdfunding, you aren’t restricted in how you can promote your launch. Product launches are extremely effective for small businesses, especially for service-based information product businesses.

If you’re still in the idea or product development stage, or are looking to attract significant capital to build your product or test your idea for the first time, crowdfunding may be a better option. But there’s no harm in studying tried and tested Product Launch techniques to help you with your pre-fundraising strategy and during your campaign. After all, you’re selling an idea to the crowd in both instances.

BUSINESS LOANS / MICROFINANCE Following the Credit Crisis, securing a small business loan is very difficult for an early-stage startup with no track record or financial statements that demonstrate profitability or cash flow.

Some savvy lending businesses picked up on this gap in the market and offer short- term financing solutions to small businesses. Thanks to the digital age, entrepreneurs can now get a working capital loan relatively quickly if they meet the criteria set by lenders like Kabbage, for example. Kabbage looks at your real-life business data (e.g. PayPal transactions) to determine your eligibility for a loan of up to $100,000.

A more traditional way of seeking financing is the investment banking model, in which you would hire a broker/ intermediary for a fee or commission. This alternative is losing popularity with early-stage startups, because many Angel investors prefer to deal directly with the entrepreneur. The introduction of crowdfunding portals is also taking over some of this intermediary market.

Microfinance, or peer-to-peer lending, is a trend that is more prevalent in emerging markets. It allows people to lend money via the Internet to low-income or under-served entrepreneurs and students. A good example is Kiva.

Kiva’s mission is to connect people through lending to alleviate poverty. Kiva connects those who wish to make small loans with borrowers looking for loans to grow businesses, go to school, switch to clean energy and more.

It’s important to note that these are real loans (not donations) and recipients commit to repayment. The average loan amount to an individual Kiva entrepreneur is $410.

Microfinance is also infiltrating more established markets. A good example is the recent launch of Elizabeth Street Capital by The Tory Burch Foundation and Bank of America. Elizabeth Street Capital is an initiative to provide early-stage women entrepreneurs in the United States with access to affordable loans, networking opportunities and mentoring support - to encourage and enhance business opportunities for women.

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WHAT’S NEXT? If you’re ready to learn more about your funding options, start by exploring how to design your fundraising strategy using the roadmap laid out in The Unconventional Fundraising Guide.

Not only is fundraising incredibly distracting but the majority of startups fail because of protracted fundraising rounds. Instead of focusing on what matters most, i.e., creating a product that works, entrepreneurs dedicate a crazy amount of time doing the dog and pony show with investors that don’t give them a firm yes or no. As it’s not in the investor’s interest to say no, this can drag endlessly unless you go in over-prepared.

Over the last decade, I’ve learned the key principles and patterns of successful deals and fundraising strategies.

I wrote the Unconventional Fundraising Guide where I share practical insights about the funding ecosystem and ideas that I have seen work firsthand to help you map out your strategy and save time.

The Unconventional Fundraising Guide includes: • Introduction to The Funding Canvas™, a roadmap for building a fundraising strategy that gets results.

• Checklists to implement core elements of your campaign.

• Master list of pitching dos and don’ts.

CLICK HERE to Buy The Unconventional Fundraising Guide Now Wander in spontaneity, Varelie P.S. If you found this guide helpful, please share it with your equally smart and motivated business friends who are ready to get funded and can use a little inspiration.

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