How to fund your startup
This is a question we ponder often at Seed, the readers of Startups Magazine no doubt question and every new Entrepreneur needs to consider. How the hell do you fund this great idea of yours.
For the record I should state that I believe the best approach to being a successful founder is to work at a high growth startup for a few years learning the ropes (and building your reputation/network) while amassing savings for 12-18 months living expenses (let’s say 14k for the core essentials) before launching your start up. It lays the perfect foundation, makes you an attractive founder and takes away the money pressures that come from this journey. We have even seen this approach develop with investment funds set up specifically for ex-employees of certain fintech companies in London…..
It is a little known fact or something people seldom take into consideration but class system exists very much in the world of start-ups – this can be seen mostly in the guidance of many when they say your first round of funding should be 'friends and family' – Warren Buffett started out like this so let’s advise kids in London from a lower socio economic background to do the same ……..let us be the first to say that the 'friends and family' round should be dead.
While I appreciate the logic of some in getting validation from those close to you and working out the kinks I have also mentored individuals who genuinely cannot read or write yet they have developed a solid lifestyle business – do we really feel comfortable advising them to raise funding from friends and family who likely have very ill liquid capital. Note crowdfunding is slightly different in that you have the formal facilitator in the platform you raise with – they charge a commission on your raise to handle all the investors and make everything legit so I guess we are saying if you choose a friends and family raise make it official via the likes of Kickstarter, Crowdcube or Seedrs (mainly UK focused here but search for the appropriate platform in your nation)
Instead I propose, building on your personal savings and hustle. We recommend two resources in particular. The Start Up loans company in the United Kingdom (similar startup focused loans globally) is a fantastic process to raise seed funds but also the application forces the creation of key business documents (some providers like Virgin even provide basic mentors & webinars). This process provides the funds required for the MVP but also makes you think about many areas of the business moving forward. This also shows future investors you backed yourself and the vision.
Not comfortable with debt – who is really? Focus your attention then on creating a company that can generate revenue from the start. This is rare because many focus on User acquisition over revenue growth with tech bubbles & headlines making this feel normal. Think about the strong position you can put yourself in with a revenue positive starting point – you can pay the bills but also when you come to raise investment you will not be in a weak negotiating position. Even if it does not fit your vision from day one just focus on making money from being self-employed – this is where you prove your worth as a founder.
Practically, I will provide an example. I run the social sports marketplace Risum. I wanted to get to know my customers and build revenue from the start so I hosted several pay as you go Football and Tennis sessions (making a small profit on each session). This allowed for the revenue to then be focused into building the final product which is now a marketplace where anyone can host & play sports. I use this first world example due to the fact that this year of pay as you go sessions was not only revenue generating but it allowed for the MVP of the actual tech product to be better due to research & feedback overtime. The mission didn’t change but by adapting it at the start it allowed for more focus on the customer instead of spending countless hours chasing investors.
The next logical stage is to find a Business Angels (use your SEIS & EIS tax allowances if in the UK) , build your advice base (find a good mentor) and focus on making your team strong and attractive – we will cover raising Angel Investment in more detail in a future article.
This then positions your startup for Venture Capital and a larger Crowdfunding campaign. The point of this article is to show that a lot of work is required first from the founder before considering Venture Capital. It is also not wise to approach Seed Venture Capital funds with just an idea – evolve things out and follow our approach you might then just have the investment funds chasing you!
Network is key but this can be created with focus. Main takeaway from this article is focus on the business model, love your customers and then the rest will come to you