Having a market problem, cultivating it into a brilliant solution, and creating a business idea are all the parts needed to start building a successful business. And then there’s that pesky funding part. Finding an investor who understands the problem, believes in your passion and idea, and is willing to part with their hard earned cash is one of the most difficult hurdles every entrepreneur will face during the beginning of his or her professional founding career.
Fortunately during the past 10 years, leaps and bounds have been made in the funding arena, especially for early stage seed investment. With the rise of incubators, lean development with rapid deployment, and change in federal regulation of investing, it’s becoming easier and easier to raise money.
There are several components in raising capital: the right message, the right audience, and the right timing all contribute to closing a seed investor.
Friends and Family
Finding wealthy friends and family that believe in you and your abilities is the first step. Some entrepreneurs are too proud to ask people they know for financial assistance in building a business. However, if you really believe in yourself and your product, you’re doing them a favor and sharing the wealth you’re about to create. You’re looking to help their investment blossom, and giving them a chance to do it with you. Although its risky, friends and family are the biggest believer in the team itself.
The Incubator Route
Incubators are cropping up everywhere, from college campuses to major cities to promote growth. Corporations have started incubators to find start-up ideas to promote their own growing business and keep competitors in house, rather than disrupt their ecosystem.
Finding the right incubator who will provide the right support, funding, and in the right location can be challenging. When examining incubators, understand the following about your own business:
- How much capital and runway do you realistically need to build your product? Many incubators are merely spots where developers are leaving their current jobs to pursue their dreams, and they can code while giving themselves a decent paycheck, get some traction, and try not to starve. Some projects take longer than expected however, so make sure the funding will last.
- Where are your talent gaps? Incubators can provide mentoring and office hours for experts to coach start-ups, and this is often exactly what a startup needs to keep costs down and team experience up. Make sure the experts are on-site, and that they are actual experts in their field.
- Are you ready for the workload? Accelerators and incubators sometimes provide an intense curriculum that includes after hours and weekend workshops. Be ready to be dedicated.
Everyone is now familiar with crowd funding and it’s great for several reasons. If you have an actual product, you can eliminate the pre-production hassle of manufacturing gaps due to pre-orders. It’s allows entrepreneurs to better plan, and see immediate traction in the market. For some, however, crowd funding isn’t the best option. If a product is B2B, has a lot of development time, and a niche audience, its harder to use crowd funding.
Flash funding is not crowd funding. Flashfunders is like a Kickstarter only with Angel’s looking for businesses where they can get early entrance into the market, and have equity. It’s a pool of viable business ideas and teams on one platform, where investors can go and see curated businesses and be able to invest as if they were on a Kickstarter.
This movement will become more and more popular, and give companies who possess solutions that have less consumer facing options, to meet Angels, and offer equity or convertible notes rather than rewards and prizes to fans.
Your Own Business
Venture Capitalist and Angel, Mark Suster, famously recommends, “Ring the freaking cash register.” The quickest way to investment money is creating value in your product and getting customers, rather than the long term dream of “if I build it they will come.” There’s false wisdom being evangelized that user’s are worth $1,000-$10,000 per head based on faulty math created by amateurs who know nothing about valuations, who believe that dividing how many users a company has by its sale price will equal the valuation. Valuations have so many moving parts that this faulty logic has lead many budding entrepreneur’s astray in their revenue building process.
Even selling the concept to a few early customers will get some cash, provide valuable customer feedback, and allow for some traction, which will attract the institutional series A.