There are 2 basic tests that your new startup / product needs to be able to pass before you’re going to get any kind of major funding or traction. Both of these tests are addressed by getting your product out there and getting people using it and its important that you can tell the difference…
Founders generally fall in the category of knowing enough to see an opportunity, but not enough to see the obstacles. Which is normal, as otherwise they wouldn’t start in the first place, but this means that they need to rely on a community of people to get feedback, guidance and to learn from others experiences.
I’ve had a couple of instances of late where entrepreneurs with very viable businesses are told that their idea is not feasible, not scaleable or not worth their while. It normally comes from a VC (or incubator). The advice is not wrong – possibly misplaced – but the one thing you need to be very aware of is the motivations and perspectives of the person giving you advice.
The first thing the VC will do is look over your business plan and if they like it, invite you in for an interview. If you manage to get through that they will want to do a due diligence audit* on your business. They will generally only invest once you have proven customers and want to ramp up your market traction and grow to own a market. Remember that most VC companies are in communication with each other so make sure to address the issues of one before going to another. They will normally cross check with other VC’s before investing.
This is the Tips and Resources section of my Funding Secrets Series.
– Fund the business as much as you can by yourself for as long as you can. Try to give as little away to investors as possible, but don’t be too cheap on giving it to people working on the business through an equity pool.
– Remember that every round of equity funding that you get will decrease your piece of the pie. Every round that you issue new stock to the new investors, the amount of stock that you hold becomes a smaller percentage of a larger pie.
– Do your best to meet the next mile stone, before the funding runs out as bridge funding gets pricey…
– Be frugal with your spending!
Here is a hypothetical example of what a typical VC portfolio could look like and why they need to invest only when they can see a potential for a 10 – 20 times return on their investment. The numbers are overly simplified (see notes) to demonstrate the point of why the Big Profits have to be such a high multiple of the initial investment.
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.
I spoke recently at a Nucleus Talks on Angel and VC investing to student entrepreneurs in Stellenbosch. One thing that I realised is how few people actually understand the different types of funding and when or how to go about getting it. Now there is no cut and dry method or simple answer but I’ll share the little that I know and hopefully you’ll find a couple of tips that you will find useful.* Firstly you need to identify between the different types of funding: