Chapter 2: :Where to Find the Money for Your p
The Basics: Bootstrapping Your
The money: it’s probably the question on every new entrepreneur’s mind.
Here’s my take on it - you shouldn’t let the perceived lack of money stop you from daydreaming your start-up. In fact, the opposite is true: the more time you daydream and get clear about your start-up and the business, the more likely you will attract money.
That’s the big picture, but let’s get into the nitty gritty of it.
After spending years in the business of starting and mentoring businesses, I know exactly what it takes to launch a start-up.
While a great business idea will go a long way in attracting investors, you often need to get the business running on a small scale before investors start showing interest. Since you can’t rely solely on your own savings, you need to find creative ways to fund your business.
To be sure, personal savings constitute an important source of funding for many start-ups, but you need to make sure you have taken care of you and your family’s basic needs for at least one year before digging into your savings. You don’t need the distraction of unnecessary financial pressure that could well kill your start-up.
Bootstrap and develop your prototype as much as possible using your own time and money; do it on the weekends, and at night if possible, while keeping your day job. The reason I suggest this is because the more developed your idea and prototype, the more likely you are to attract seed capital and investors for your project.
In addition, you do not want to sell yourself short. The more developed your prototype and business model, the more value you can command and the more funds you are able to raise in the next round of your capital raising.
Bootstrapping and taking your business/prototype to the next level could mean a massive difference in the valuation of your business and prototype. So the longer you can bootstrap, the better it will be, both for attracting investors and also for the valuation of your start-up.
I’m sure you have heard of stories of entrepreneurs bootstrapping on credit card debt. While I wouldn’t suggest this path, it really depends on your risk appetite and your life circumstances. If you are 50 years old with little savings, I really would not suggest doing this. However, if you are 25 with no family, live at home and can always fall back on a job, this may be a path you might want to choose.
When you are ready for the next stage, that’s where seed capital comes in. Seed capital is usually a smaller amount of money to fully develop your idea and prototype to a point where it is working.
The initial ‘seed’ money does not guarantee success, but it will give you a real shot at taking your business to the next level. A lot of young entrepreneurs struggle at this stage and one can only guess how many great business ideas don’t take off because they lack that initial funding boost.
The good news is everyone from the government to angel investors are looking at new business ideas with greater enthusiasm today. So you have options to choose from while searching for funds. Of course, you will have to see what works best for your business.
The truth is, there’s a lot of money out there, much more money than ideas. That’s why you need to daydream, to get clear about your venture, to attract that money. Without clarity and communication, you will not get the money required for your start-up.
You may just want to weigh the positives and negatives of each option before jumping into it.
I am giving a summary of the options and my thoughts on each so that you can weigh each option objectively for your venture.
Government Grants and Loans
Does the state really help folks who are starting businesses? Even I was skeptical once, but in the last five years, things have changed significantly in most advanced economies.
It might sound too good to be true, but governments actually provide grants for starting businesses.
Governments grants generally do not have to be paid back - essentially it is ‘free money’. However, they may involve certain conditions that we will discuss later on. Government loans on the other hand, generally need to be paid back at a certain time. However, the criteria for the loan and the payment terms are generally more favourable than banks.
First, why do governments give out grants?
The reason is simple: they give out grants to start-ups because they are hoping that some of those start-ups will become viable businesses, to provide employment to their citizens in the future. In addition, they hope that those start-ups will one day contribute their fair share of taxes when they grow bigger.
Australia, which has various grants and concessions for IT start-ups, understands the importance of ICT start-ups to a country. According to a 2013 Google Australia PriceWaterhouseCoopers study, the Australian technology start-up sector has the potential to contribute more than $100 billion (4 per cent of GDP) to the country’s economy by 2033.
Getting a grant may not be all that easy, but the key is to give it an honest shot. The US federal government, for instance, gives a range of grants in various categories. One of them just might fit in with your business idea. If you’ve worked out your plan in some detail and it’s a niche business proposal, your chances to land a grant just got higher.
Many Asian countries like Singapore have good grants and support for start-up businesses. Often they target industries where they see good potential, such as ICT and biotech. However, there are grants for all types of industries.
Before you apply for a grant, you need to make sure that you are applying for the right one. There are grants with different criteria and are looking for different things. Study and understand what they are looking for before you submit your proposal. It also may be advisable to engage the services of a government grant consultant, as they would be a lot more familiar with the criteria and process of each grant. They could save you a lot of time and effort and, at the same time, maximise your chances of success.
Now for the considerations you will need to take into account when applying for a grant.
Firstly, you will need to consider whether you want to go through with the red tape and paperwork of applying for a government grant, and whether you want to work with the conditions imposed as a result of the grant. In some cases, you will need to be tied down to a certain country or have certain deliverables in a set period of time. In many cases the government grant program may dictate that you spend the money in a certain way, not necessarily the way that you may want to. You simply have to ask yourself if the grant is going to be worth it in the long term if it is going to limit your business’s potential for growth.
So make sure you check the various limitations and restrictions upfront if you want to go down the track of getting a government grant to fund your start-up. The good thing about most government grants is that they do not expect any equity or repayment on the money you get from them. That is a huge positive as you may not want to have the pressure of a loan or investors demanding a return from you.
Remember, if the government says no to your application, take it as a learning experience. Normally their panel will have experienced people who can provide invaluable feedback for your product and your business approach. Make sure you incorporate this into your future development and business.
Don’t let a ‘no’ be the end of your start-up; it’s often an opportunity to make tweaks and improvements. In addition, it sometimes is not your idea that is at fault. As I mentioned before, government grants usually have certain parameters and criteria that they need checked off before they can be given to you. So often it doesn’t mean that your idea is not viable, it could simply mean it doesn’t meet their criteria.
Family and Friends
I’ve always believed that the people who trust you most are most likely to willingly part with their money first. Yes, I’m talking about your family and friends — they are the ones who are most likely to believe you when nobody else does. They are the ones who will have the greatest tolerance for weaknesses in your business proposal. So, they’re a good place to test the water.
And if you find yourself unable to fully answer the questions of people with whom there is zero trust deficit, then it is time to re-look at your business blueprint. Or, to put it more bluntly, if you cannot get past family and friends, then your idea probably won’t fly and you really need to spend time more time daydreaming.
I’d like to stress, though, that this is a process. You get some money from friends, do some work, show them the work, get a little more money. You don’t have the luxury of waiting it out till that big funding arrives. Work with what you have and start building your business before asking for more.
Often people ask for a big amount upfront, rather than staging their funding. If you are able to deliver what you promise on your small amounts, the likelihood of getting more funding from the same people increases exponentially. This applies to all types of investors.
The one thing to consider is to make sure you have a proper agreement drawn up with them, and explain all the risks and downside to them. The best friends and family investors are those who are prepared to lose their money. However,
I personally think you should also make sure they are not investing all their retirement savings with you; after all, at the end of the day you do not want to lose any friends or family in the event that something goes wrong.
Furthermore, you do not need that burden of knowing their retirement depends on you…it’s just unnecessary pressure. As a start-up entrepreneur, you have enough things and worries to deal with on a daily basis. You simply do not need your uncle to be complaining to your partner that he is worried about his investment and wants his money back.
Angel Investors
At some stage, you may have to make a pitch to investors with deeper pockets. This is where angel investors come in play.
Angel investors are generally rich individuals who are looking to get a slice of the ‘next big thing.’ They are often ex-business people who have sold their businesses, and want to apply their finances and knowledge to invest in start-ups, in return for a reasonable slice of equity in your business.
As I said before, you ought to do this after a prototype of your business is already up and running, and now you’re looking to scale it up.
But think of angel investors as one among a series of investment opportunities which are out there to be exploited.
When choosing an Angel investor, I suggest to not just look for money. Look for ‘Angels’ with relevant experience and contacts in your industry. Sometimes the contacts and experience that they have are worth more than the money they invest. One simple introduction to the right person can mean a complete transformation of your business.
Once you’ve moved beyond your circle of relatives and friends, people will ask you: “At least show me a customer, or at least show me a prototype, or at least show me some market data.” It’s okay if you can’t satisfy them. Never get disappointed by rejection. Business successes are often built on a series of rejections. But never leave a meeting without clearly asking — and knowing — why your pitch didn’t make it. No textbook will teach you this invaluable real-life lesson.
How does daydreaming come into play here? Well, it’s my experience that with angel investors, the clearer and more passionate you are about your venture, the more likely you are to attract them.
This is because Angel investors will often invest in the jockey rather than the horse. They may evaluate you as a person more than they evaluate the idea. If you show clarity and a well-thought out plan, this will give them the confidence that you are potentially a good bet.
So spend time daydreaming not just about what is possible, but what could go wrong and how you would handle those setbacks.
Crowdfunding
As a ‘new kid on the block,’ crowdfunding is fast gaining popularity as a means to fund start-ups.
Australian firm LIFX developed a smart home device — long-lasting, Wi-Fi controlled lights which are brighter than regular bulbs — and took the crowdfunding route through the site Kickstarter. About $1.3 million was pledged in less than a week, and investors added another $2.1 million.
There are many more success stories on crowdfunding platforms. Funding projects can be as little as a few hundred dollars to over a million dollars. The positive thing about crowdfunding projects is that you do not need to sacrifice equity, nor do you need to pay back any money. However, you will need to fulfil the promises of the incentives that you have agreed to.
In crowdfunding, a large number of people may make online pledges to pre-buy your product or give donations. There are different models of crowdfunding, and you should find out what suits your project and what kind of projects attract people’s attention.
The two major sources of crowdfunding are Kickstarter.com and Indiegogo.com. Kickstarter has been around longer and has more funders. However, the downside to Kickstarter is that they do not give you the money unless the funding has reached the minimum milestone. They will return money to investors if the total funding is below that. Their logic is that the start-up will not succeed if it doesn’t reach the minimum funding requirement.
For Indiegogo, they will give you however much money you raise from the campaign. The shortcoming of Indiegogo is that they have less funders than Kickstarter and generally is more suitable for smaller amounts of funds.
To have a successful crowdfunding campaign, here are some guidelines.
a) Look at successful campaigns and what they offered as incentives for various funding levels. Try and emulate that.
b) Get your friends and family to get the ball rolling…if there are zero funders for your campaign it is unlikely that anyone will donate money. Get your friends and family to start donating a few hundred or few thousand dollars to get some momentum.
c) For larger amounts, it is advisable to either spend money on ads or on a good media publicist (particularly if your product is very newsworthy). The investment will yield good returns for your crowdfunding campaign.
I’ll be the first to admit I’m no expert at this type of funding. But at the time of writing this book I have tried to fund an AI Chess project through Kickstarter. While we raised over $11,000 it was way short of the total we wanted to get the project up and running. It was a good experience and we may adjust our approach and try it again.
To be honest, I do not know whether crowdfunding is a passing fad or will be here to stay. Currently crowdfunding is still popular at the time of publication of this book, so it may be worth jumping on this gravy train while it still is!
It’s important to note that the platforms mentioned above are reward-based platforms for crowdfunding, ie, you get a reward or product for your investment. There are also equity-based crowdfunding platforms such as the Australian Small Scale Offering Board (ASSOB) in Australia and Crowdcube in the UK. On these platforms, you would give away share in your business in exchange for investment funds.
Stages of Fundraising
It is important for you to stage your fundraising into small steps. Most start-ups do not follow these steps and as a result, confuse investors and fail to raise the necessary money to get their business going.
Firstly, you have to establish and prove that there is a need for your product in the marketplace. You will need to confirm that the need is real through market research or market data. In other words, you will need to prove that people are going to buy your stuff!
Then when you raise money, make sure you are clear about what the money is going to be used for. Are you going to convert an algorithm into code? Are you building a prototype?
The mistake many start-up entrepreneurs make is that they over-promise. They often think that investors want to see a return in the first trench of investment. However, professional investors look for milestones.
At the first stage they are often looking for initial proof that your concept actually works. So if they invest money at this stage, that is all they are looking for - don’t try to deliver more than what is required. In fact, if you do that you will come across as an amateur and confuse the investors. More importantly, you won’t be able to live up to your promises and lose the trust of your investors.
In the second stage, they sometimes are looking for whether the concept can actually be better or result in savings compared to the current solution in the marketplace. The money should only be used for this purpose, to prove your concept can actually work better than others out there.
Then in the third stage, you may be looking for money to prove that your product is deployable. You need to use the money to find out what it would take to deploy your product in a live situation.
At the fourth stage, the money that you raise can used for deploying your solution in a live situation for testing.
Finally, the fifth stage might be where you raise money so that it can be commercialised and marketed.
Just remember, at each stage you need to show clear outcomes and KPIs (Key Performance Indicators) of what you aim to achieve with the money that you raise. And your goal as a start-up entrepreneur is to make sure that you can deliver on the promises.
For example, one of the companies that I’m involved in raised $200,000 with over a million dollars valuation just for stage one and two. This money was raised just to translate part of their math formulae into software code!
So make sure you stage your money raising, don’t raise more money than you need and don’t overpromise on what you can deliver on each stage. By using this framework you will be able to have more success with your capital raising.
Conclusion
There are many ways of funding a start-up, but always start by bootstrapping and funding the project yourself. Be financially wise and take care of your family first…make sure they are not wanting, otherwise they can create a lot of unnecessary stress for you. Spend time to plan your finances. Ask yourself, “Can I live with the worst case scenario?”
If you can live with the worst case scenario, then it’s time to get daydreaming! Daydream to get clear with your product and your venture.
Then take the next step by planning and creating your prototype, followed by one or more of the seed capital sources to get your next round of funding. Then consider quitting your job and going full-time once you come to this stage; because this is when things really start getting exciting!