In the beginning you should be bootstrapping the business off your own money or maybe from FFF (friends, family or fools) This should get you as far through the idea stage and finding a founder or two to help you get started. Normally once you get to the point where you need to build a prototype, or hopefully just afterwards, you’ll need a round of funding to give you a boost. This is where you go look for angel^ funding.
This ‘first’ round of funding is generally called your seed funding. The purpose of this funding is to setup the business (get office space, register, apply for patents, etc) and to get you to the next milestone or further. Try not to spend all this money at once as there are bound to be many unforeseen speed bumps and delays along the way and time is one of the most valuable things to a startup.
The idea with your prototype is to build the “Minimum Viable Product”. Remove features from your product or service one at a time until it no longer becomes your product. Add the last feature again and what you are left with is what you should build and get to market. The rest of the fluff you can add later.
When you can start to see the end of the funding ( hopefully giving yourself a couple of months to negotiate ) you need to start looking for the next round of funding. This is when you need to start approaching venture capital firms^ for “Series A” funding. You will normally have to at least have market validation^ and preferably market traction^ to be eligible for VC funding.^
* As the South African Angel market is rather limited, there are some VC’s that are moving into early stage funding. These requirements are for traditional VC funding and not the hybrid model that we sometimes see in SA.
^ Angels are early-stage investors who are normally wealthy individuals who are looking for interesting ways to lose (invest) their money. They normally have quite high risk profiles and will invest anything from R50 thousand to R1 million for about 10% equity stake. They normally have experience in your industry and often take a board seat and have plenty of good advice and input for the business – providing whats called “smart money” or “money and advice”. They are generally the “Wiseman” in a startup.
^ Market validation is evidence that there is a market for your product or service. It requires you to ask: “Is there a gap in the market, and a market in that gap?” Normally, this will involve research and interviews with potential customers. Get out there and talk to people who want your product / service.
^ Market traction is when you actually have some customers who have actually paid you real money for your product / service. It does not include giving your product away for free. This is showing that your idea can make money.
^ Venture Capital firms are companies that manage funds for various rich individuals. These rich individuals, or limited partners, give their money to the VC (General) Partners to invest in their behalf. They are expecting a decent return on their funds that would be higher than if they gave their money to a bank or stockbroker. An example would be 15% annual return over 10 years or about 2.5 times their money back after 10 years.