You have an idea and are willing to put in plenty of sweat equity but you need capital. Now what? Raising seed money is the first challenge entrepreneurs face. However, finding the right source of capital is far more complicated than just getting cash to fuel your business idea. Some entrepreneurs are so eager to get money that they do not apply enough scrutiny in assessing their investors. The decision where to raise money will impact your ability to succeed as a business and has far reaching consequences. So entrepreneurs should choose wisely and be aware of the downside of bringing investors in.
The two well known ways to raise money for a startup are
a) venture capital.
b) investment from friends and family
a) Venture capitalists may bring valuable experience and different level of support in getting off the ground and running. Some venture capitalists would help you with marketing, building out a team and general management oversight. For example, some VCs have staff members who support entrepreneurs with common business challenges such as office space, marketing, and accounting. Reputable venture capitalists are usually positioned to bring follow up capital and participate in later rounds. The downside of venture capital investments is that these could be expensive. You may need to part with a bigger share of the company’s equity than you are comfortable with. Also the venture firm partners may not have the same long-term strategic vision as the founders and may force your to aim for short-term financial returns that match the investment timeline of their fund.
b) Friends and family members may be willing to put money in your business because they like and support you, but probably know little about the space you are focused on and therefore, may be unable to add meaningful value beyond just capital. Getting an investment from friends and family does not validate your business idea and it may thus, be harder for you to raise follow up capital from reputable investors.
i. Find the right co-founders :
Creating the right founding team is by far the most important decision you can make as an entrepreneur. I often see cofounders with very similar backgrounds For example, two former investment bankers starting a fintech company or two technologists building a product that will revolutionize social media. Working with someone you know who has a similar way of thinking may be expedient but counterproductive in the long run because your founding team may lack valuable foundational skills. An alternative and more effective approach is to find a cofounder who has complementary capabilities based on the business model you want to implement. Thus your new venture would be more self-sufficient and would require you to hire less people early on. If you are starting a technology company, make sure the founding team has strong technical skills. If the consumer space is of interest, ensure you have marketing experience. The core functions of your business should be covered by your founding team. For example, the emergence of a new real estate asset class – the buy-to-rent space, has brought together unlikely partners – the local real estate operator and the ex-Wall Street professional
ii. Look for strategic investors :
Strategic investors are the best type of investor you could find for your business because their interests align with your start up. Additionally, strategic investors may give you higher valuation because they see benefit from your business idea beyond the financial upside. Who is a strategic investor? A strategic investor is expecting to gain more than just a financial return from the success of your venture.
Strategic investors can be both companies and individuals. Look for companies with mature business models that aim to expand in new areas. Such companies invest in startups to either solve a problem they currently face or to expand into new markets Many large corporations, such as State Street, IBM, Intel, Lucent have venture arms that invest in startups. Google and Microsoft are companies with significant cash reserves and venture arms that make both early and later stage investments and add tremendous credibility. Other companies may be willing to do so opportunistically. In addition to investing early on, corporate strategic investors can end up being clients, promoters, go to market partners, and even potential acquirers.
iii. Find a clients that would pay you to build a product :
There is no bigger validation for your product or service than getting a target client to invest in your company. Client investment comes in different ways:
A client may be willing to be an early adopter and pay to cover the cost of an initial prototype development.
A client maybe willing to make a direct investment in your business.
If you have a product with little viable competitors, a client is more likely to help you build your business than if there are many available solutions.
Typically, a client would want you to share the downside of your startup not delivering because there is operational risk in selecting an unproven service provider.
iv. Participate in business plan competitions :
Business schools and many other organizations have business plan competitions that are open to alumni and students. You can find complete listing of entrepreneurship contests, elevator pitch events, and business plan competitions at business plan competitions. If you enroll in startup competitions, at a minimum you would perfect your elevator pitch and would learn what investors look for. You would also be able to see other entrepreneurs pitch their ideas and learn from that. Winning a business plan competition can provide some seed capital without diluting your equity, lend you credibility, give marketing exposure, and attract venture capital. The downside is that the funding coming from business competitions is rarely sufficient and you may need to pursue other sources simultaneously.
v. Utilize crowdfunding platforms :
Crowdfunding is a recent but growing phenomenon with a mixed reputation. Crowdfunding has been criticized as it may bring unsophisticated money to unsound ideas. However, crowdfunding can be a good early validation of your business idea especially if that idea is in the consumer space. If target customers are willing to pay through crowdsourcing to develop your product than later venture capitalist would be more likely to invest and give you a more favorable valuation.