Written by Steve Penfold, Angel Investor and Board Advisor supporting over 25 Digital Businesses in Brighton and Hove as part of the Wired Sussex guest blog month
So, you’ve got an amazing idea for a digital startup that will take over the world.
Great. That’s the easy bit out of the way.
Now for the hard work - Building a product or service that you can monetise, telling the world about it in a cost effective way, and perhaps raising investment to help with one or both of these things.
As you’re a member of Wired Sussex I’m sure that I don’t need to tell you about the more obvious routes to raising cash for your startup such ‘friends and family’, bank loans or government funded initiatives such as Nesta and the Technology Strategy Board.
However, if you’ve already tried the routes above - read the rest of this post to hear about 7 slightly less ‘well trodden’ routes to getting the cash to build your product or service and to tell the world about it.
Photo credit: http://www.hollywood.com/news/movies/7838150/how-do-you-feel-about-the-release-of-top-gun-in-3d?page=all
1. Get your customers to fund your development
Esther Dyson famously said - “The best investor is your customer.”
What does that mean? It means that by having one or customers fund the development of your product, you know that you are solving a real problem that they (and likely
others) will pay for. It also means that you don’t have to borrow money OR give away equity in your startup.
How do you do it?
In summary, find a group of customers that have a huge pain point that can be solved with software. Design (not build) a solution will solve their problem and get them to agree. Ask them for a cash deposit to allow them to be the first to have access to the system.
For more on this - read the awesome ‘Running Lean’ by Ash Maurya. Gives you step by step instructions on what to do.
2. Take early retirement
Bit of a ‘curve ball’ this one but definitely worth a mention. The basis is this:
Reduce your outgoings drastically to a point where you can either save money each month to create a financial ‘cushion’ for yourself or be able to live off any investments you might have.
If saving, do this for as many months as you need to in order to create a ‘12 month’ financial cushion to allow you to stop work altogether.
This will give you say 9 months to get your startup off the ground which is possible if you’re working full time on it.
As a safety net if you haven’t be able to progress significantly in 9 months you can use the remaining 3 months to find new paid work so you end up where you started. (Which is way better than being in debt)!
For more on this - see ‘Retire Early and Then Start a Company’
3. Get your service business to fund your startup
Many of you reading this will be running a digital agency or be a freelancer. Your ‘service’ business will be generating an income that could be used to fund your startup.
Here’s how to do it:
First of all, generate more recurring revenues. This will save you a huge amount of sales and marketing time. (See my recent post here on how you do this).
Spend 1 day per week (or more) working on the startup, with the rest of the week spent on your service business.
Provided you have regular recurring revenues, working 4 days per week on your service business and making the same income that you are now should be achievable.
When the startup starts generating its own revenue you can then spend more days per week on it.
There will come a point where you have to decide whether to migrate your service business into a product business or keep them both running in parallel - but if you’ve got to that point - you’ve already done well!
How do I know this works?
This is exactly how I got my first product startup www.projectminder.com off the ground which we eventually sold to the IRIS group.
4. 0% Credit Cards
I wasn’t sure whether to include this one as there is clearly an element of financial risk (as with bank loans).
However, unlike bank loans if you are clever, borrowing from credit cards can give you a 0% rate.
This could then be used to fund a short term product development for example.
Of course there are also risks taking this route. If things get really dire, this could also mean your personal assets as well as your business assets get seized if debt collectors get involved. If you decide to go down the credit card route it’s important you set yourself boundaries and limits to avoid getting into hot water.
Founder of Tropolis Group, Bob Herman, financed with credit cards when he started his company back in 2010. He stuck to a cash-back rewards program in order to use the bounty to buy supplies for his business. So far Herman has put $60,000 on credit cards mainly to fund software development but says the key is to not get in over your head.
“I only put monies on the credit cards for which I know I have corresponding payments due from customers. I then pay off the cards in full each month to avoid the high interest on revolving credit.”
5. Crowdfunding
Crowdfunding is becoming a more popular form of raising funds for startups in the last few years.
It refers to a network of people willing to pool their money and resources together to help fund a project or company. One of the real selling points of crowdfunding is the social element of ‘the crowd’. Not only do you raise money but you get people to help spread the word about your business.
A great example of a recent crowdfunding effort in Brighton is hiSbe Foods. hiSbe stands for ‘how it should be’ - they recently crowdfunded £30,000 to launch their ethical supermarket. As well as reaching their target funding, hiSbe also generated an enormous buzz - going viral on social media platforms such as Twitter and gaining a lot of PR and press attention.
To be successful with Crowdfunding you MUST have a compelling ‘Story’
hiSbe were successful as they had a compelling ‘Story’ and a very clear outline of what they were planning to do and what they needed in order to do it. They cleverly used public controversy in the local area surrounding supermarkets so easily gained the support of the public.
If crowdfunding seems like a good option for you, then make sure you have a great ‘Story’, are crystal clear about what your business stands for and what you can offer.
However - one of the major cons of crowdfunding is that it is very hard work. Most likely people will be investing very small amounts of money so you’ll need to get a lot of exposure in order to reach a large sum of investment. This either means you need an existing group of supporters or are able to quickly grow an enthusiastic audience in a short space of time.
In the UK alone there are now a number of crowdfunding platforms. These include:
6. Angel Investors
Angel Investors are people willing to invest their own money into a startup in the early stages in exchange for an ownership stake. Many Angel Investors are successful entrepreneurs themselves who have some spare cash or who have sold their businesses. Typically they will invest £10K - £100K.
The insight they can bring is one of the biggest selling points of working with an angel investor as their experience can hugely help grow your company and coach you into a successful entrepreneur.
Looking for an Angel Investor? Here’s a massive tip;
As Angel Investors are individuals, they are all different. They have different backgrounds, different experience, different attitudes to risk, different interests, like working with different types of teams, I could go on but you get the picture - they are all complete individuals.
And this is what most entrepreneurs forget. What motivates an individual Angel Investor..
Before you pitch your startup to an Angel Investor, take some time to find out a bit about them - how did they make their money, what have they invested in before, what would they like to invest in?
It’s amazing how many entrepreneurs (almost all) don’t do this.
If you do this well, it will save you time pitching to the wrong Angel Investors and help you to make good relationships with the right Angel Investors for you.
7. Venture Capital (VC) funding
VCs are companies who make a business out of investing in startups and growing companies. Unlike Angel Investors, they tend to offer much larger amounts of funding which can be beneficial if your business requires a larger cash injection to capitalize on a market opportunity.
Two Brighton companies that have recently raised VC funding are Pure 360 and Brandwatch so although not an ‘every week’ occurrence like in Silicon Valley it does take place in ‘little old’ Brighton.
Of course, if you choose to get funding from a Venture Capitalist you’ll need to be prepared to part with equity in your business.
This type of funding is generally (but not always) more suited to companies who are in a good position to expand and grow quickly. If you already have a great business with a good customer base and simply need a decent chunk of cash (say £500K+) to really make the most of your market and outrun your competition - then it could be for you.
Venture Capitalists, like Angel Investors, offer more than just money; they can bring tremendous value in their experience, insights and advice from years in the business. They’ll have watched hundreds of startups succeed and fail and that experience could be invaluable to helping your business succeed. The key is in choosing the right VC for your business.
Next steps
Of all the options above, option (1) ‘Getting your customers to fund your development’ is the one that I would always suggest first. You get paying customers early on, which you can then quickly partner with for case studies for selling to the next round of customers, all without giving up any equity.
However, if this isn’t possible then the other options could be right for you.
Best of luck!! Let me know how you get on - I’d love to know.
Also see his educational blog for Digital Entrepreneurs, www.smartdigitalbusiness.com