t takes money to make money. Before you make money, you have to spend money. Do you have enough capital to reach break-even again without any outside investors? Using your own money to start your business is known as “bootstrapping.” If you don’t have enough money in your savings, then where will the money come from to start your company?
Then the question becomes: Should I bootstrap my company or seek outside investors through friends and family, grants, incubators, angels, or venture capital?
To begin, do you have friends and family willing to invest in your startup? Have you considered running a crowdfunding campaign? Are there any business incubators or accelerators available within your business sector?
Are you working on a socially-conscious business, or a clean-tech business? Are you a researcher at a university? If so, there may be grants available to you. Does your city, state, or country have grant programs for entrepreneurs?
If none of those options are available, then you will need to seek professional investors, which take the form of “angels” and venture capital funds (VCs). Angels are wealthy individuals who invest their own money. Venture capital funds are collections of wealth from multiple sources, managed by a group of professional investors. Note that VCs typically have well-defined missions for funding companies in specific industries (e.g., software, healthcare, clean technology, social enterprise) and often at a specific stage of development (e.g., seed capital, early-stage growth, later-stage growth).
In terms of fundraising for technology companies, a good rule of thumb is that if you need less than $50,000, seek out friends and family, crowdfunding, grants, small business loans, incubators, and, if all else fails, credit cards. Between $50,000 and $1,000,000, seek out angels, angel groups, incubators, and the rare “seed-round” venture funds (i.e., funds that invest alongside angels in very young startups). Beyond $1 million, seek out “early-stage” VCs.
In all cases, the odds of finding the funds you need are low. Which means the odds of getting your business funded are low (unless you use your own funds, which many people cannot do). I did say this was not going to be easy! The odds of raising funds from angels and VCs are often less than 1 percent. However, these odds can be increased. In the case of angels and VCs, the investors choose their investments first and foremost based on the quality of the team and secondly on the product. So, having an excellent team is essential for raising funds.
Given the low odds of raising funds, I challenge all the entrepreneurs in my accelerator programs to create a “bootstrapping” plan, i.e., a version of their financial plan that assumes no funds are raised beyond your own savings plus a small crowdfunding campaign. In many cases, such a plan is possible. If so, I suggest the entrepreneur follow that plan, postponing the idea of outside investors for at least a year.
Whether you are bootstrapping or not, the fact is that most investors prefer companies with customers and revenues, so before worrying about investors, worry about how to demonstrate your company’s potential to generate a profit.
This series has been curated from Luni’s book, The Next Step: Guiding You From Idea to Startup. For more on business planning, planning your marketing and sales efforts, creating a financial model, crafting a great pitch, raising capital, and splitting the pie with your team, check out the complete series.