Starting a sustainable business is like starting any other business in one way: you need some capital to get it off the ground. What differs between different kinds of businesses is how much you need.
With a VC-backed business, often the goal is to make as big a splash as you can. Before unveiling your site, you look for ways to build buzz, create demand, and come out of the gates gaining as much traffic and attention as you possibly can. This approach justifies spending a bunch of money to build big enough and have enough people around to deal with the issues that might come up when your relatively untested product meets a huge audience -- in pretty much every way, this is a risky way to build a business, and one serious mistake can tank the whole venture.
A more sustainable approach starts small, gains a tiny user base to test the waters, work out the kinks, and grow slowly. The goal is to get cash-flow positive as early as possible, which means finding a value proposition that has a customer base willing to pay.
What kind of numbers are we talking about?
We have been working with a few different startups trying to gauge how much seed money they need to get something useful to market. On three different projects, our ballpark suggestions have all been the same:
- $5K -- build a non-functional prototype as a prop to talk to investors
- $20K - $30K -- get something functional up and running, a sub-set of your overall vision -- the smallest amount of functionality that you can start to generate revenue from
- $50K - $60K -- get your first set of features solid with some polish, and have something that should be sufficient to get profitable
- $200K - $300K -- overall budget for full feature set, before building an in-house development team
How much do you need? Might be anywhere in that range. The more money you have, the faster you can go. And if it's other people's money, it might be the faster you need to go. How fast/how much you need is really the question here -- if you're going for the venture capital route, you'll go as big and fast as you possibly can. If you're going for a sustainable business with a priority on revenue, you'll need to start out slower. But you still need some money to get going.
Where do you get money to start a business? Here are the most common places:
- Friends and family
- Bank loans -- can be difficult to get unsecured, typically an SBA loan is much easier but they also want collateral. A surprising number of people use credit cards.
- Partners
- Vendors
- Angel investors
- Incubators
- Customers
Customers
By far the best is that last one, customers. If you can find a key customer willing to pay the costs of development up front, that's what I would look for. If you can find several each willing to front you some part of the cost of development, well then, you're in business already! This is the model that sites like Kickstarter are starting to revolutionize, bringing customer funding to projects with small customers, instead of being a model that only works in the enterprise space.
Incubators
Incubators are groups with a variety of models, some of which include financing product development. Some of these are great, others not that much of a good deal. We're seeing a huge rise in shared office spaces that are calling themselves incubators -- basically places where you can work shoulder-to-shoulder with potential partners, investors, customers, and smart people in general. Other incubators are run by angel investors, or are internal to large companies with a research budget.
There are also programs that can get you jump-started. I would strongly suggest checking out Founders Institute, TechStars and Founders Co-op, especially if you're considering going the venture capital route. These organizations give you a very solid foundation for launching a successful business, including providing mentoring for you as an entrepreneur, lots of connections to angel investors and other successful entrepreneurs, and more.
TechStars recently announced they were giving away $118K to new ventures to get them off the ground.
Those last few options seem to be the best path towards going the VC route -- they are all setting you up to go get more funding and take that fast path. But it's definitely something to consider, and there's a lot you can learn through those programs that apply equally well to a more sustainable self-funded growth path.
Angels and education
Before approaching any groups of Angel investors, you really need to educate yourself on what investors are looking for, and how to create a pitch.
There are a bunch of events for entrepreneurs that can really help you learn the ropes of setting up business plans, raising money, figuring out what you need to know to succeed. MIT EF puts on a "venture lab" series -- just wrapped up for the year, but I highly recommend going to those if you get a chance, and there are videos of them online here. Also check out the Northwest Entrepreneur Network (NWEN) for some excellent programs about the nuts and bolts of setting up a business. The other local organization I've heard of but haven't actually checked out is TiE.
Once you've gotten a sense of how investments are done, then you might see if you can get an invitation to pitch to the Alliance of Angels, the Zino Society, or the Keiretsu Forum
Vendors
Do you have a key vendor who might be willing to invest? We've been known to reduce our rates in exchange for equity. Conceivian might be another possibility for getting an application funded and built.
Generally vendors are looking for you to pay them, but if you're helping a large vendor reach a big customer base, they might be willing to fund some of your development.
Partners
Ok. Partners usually mean either vendors or customers. Or they might mean both. At Freelock, we've found it very effective to partner with graphic design firms like Eben Design and PLY Interactive, and we're starting to work with more PR/Marketing firms like Jasculca Terman and Ikonic Media. Most of the time these are customers, but as we develop customer relationships with larger companies, we're able to bring them on as vendors, too.
Another kind of partner deal is between a small company and a much larger one, especially in the software world. Most enterprise software companies rely on an ecosystem of local partners to actually reach customers. Often the large company charges the small one to become a "partner", sometimes with an exclusive territory, usually with some training/co-branding opportunities, and often with leads channeled to the local partner.
I would tend to avoid those lop-sided partner arrangements, and look for possible partners who already sell to your target market. If you can piggy-back on their marketing, get included in a newsletter or direct mail, you can get great leverage that might help you get started. If your product or service can complement that of the partner, they might be willing to help finance your startup costs.
Self financing, bank loans, friends and family
A huge number of businesses get started based on personal debt. It's the classic "put a second mortgage on the house" to fund the business. This is really a bad option, but it might be your only option.
You have to consider the key value proposition of your business. You're trying to solve some problem that people will pay you money to solve. If you have a good value proposition, your cost of solving it is lower than your customers' cost of living with the problem. If you don't already have the money to fund your solution, try to find somebody who cares about your problem, and has more money than time to deal with it, and get them to finance it.
One newer option in this type of model, if you can't get bank or SBA (Small Business Adminstration) financing, might be a micro-finance site such as Kiva.
The reason to avoid personal debts in business is that lots of businesses fail for lots of different reasons, but one fundamental reason: they run out of money. (Or didn't have enough to start with, or couldn't find enough paying customers, or had some unanticipated event, or... all money.)
If you're on the hook for a business failure, you can't afford to fail. Many investors may want you to be on the hook for it, because you'll be motivated to make it succeed. The problem is, if you're focusing on how to pay your payroll and your mortgage, you're distracted from taking chances on the bigger ideas that might get you there quicker.
I'm not saying to avoid personal debt -- you're going to have to put something in. Just be aware of the pressure you put yourself in, and make sure you can deal with it constructively, use it to fuel a strategic business "pivot" instead of just freezing.
Ok! That's a run-down of the places I know to go get money to start a business. What have I missed? Anything you'd suggest that I overlooked? Disagree with anything I said? Please leave a comment below and tell me about it!
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