Companies like Airbnb, Uber and Slack have one thing in common: they were all founded during the Great Recession starting in 2008. Now we once again find ourselves in a tough period, where businesses are doing their best to find new ways to survive and thrive. While fundraising has also gotten tougher, there is no reason to despair: in this article we’ll set you up with some essentials to make the best of these unusual times.
#1 Start out by bootstrapping
While fundraising is a major priority for a lot of startups, it is often more interesting to start by bootstrapping. This term comes from the phrase “to pull yourself up by your bootstraps” meaning to succeed without any outside help. For startups it means starting a lean company without outside investment and growing your business through sales instead of capital. Beginning with minimal resources makes for a more efficient operation and sounder decisions. Building a company from the ground up also makes it stronger by testing assumptions and limitations early. Ultimately this builds a better case for investors by demonstrating the potential of the product or service as well as your startup’s scrappiness and creativity.
Easier said than done, of course. If you’re bootstrapping, money is going to be tight. You will probably have to rely on savings, personal credit or early revenue to keep going. But it also means that you won’t waste a minute in going to market, giving you a competitive advantage. The other advantage of bootstrapping is that you maintain complete control over your business. Accepting outside funds means giving others a say and perhaps adapting your vision, timeline or values. While there are solutions like super-voting rights that can help you keep control when raising capital, bootstrapping is the way to go if having the last word is a major priority.
#2 Don’t automatically ogle VC money
Startups are often eager to join forces with venture capitalists from the get-go. They typically start their hunt for seed capital with the “three F’s” or standard business angels: family, friends and fools. But it’s worth broadening your horizons and looking at other possibilities too.
One area that is often overlooked are subsidies. Good news: our partnerVenture Campus can help you with that. “The art is to relinquish as few company shares as possible in early capital rounds,” says James Troch from Venture Campus. “That’s tough if you don’t have any revenue yet. That’s why it’s worth finding out if the government can support you with a subsidy, which won’t cost you any shares.” On top of giving you a capital boost, eligibility for innovation subsidies also gives you an edge with potential funders.
Another tactic Troch recommends is trying to find a funding customer: a customer who will pay up front for services in exchange for a discount. “The customer takes the risk that they will benefit from the service late or even never, in exchange for a much better price,” he explains. This won’t cost you any shares either.”
Or what about a crowdfunding campaign, like the one our startup Yuma Labs recently did (very successfully, we might add)? Crowdfunding gives you the chance to involve likeminded people and create a community around your product or service. This way you can gauge interest and better understand what aspects draw people in, giving you a better market feel and improving your pitch. Another way to raise funds without compromising your vision.
One more option you may have heard of is corporate venturing. This is where bigger companies invest in a startup, becoming a shareholder. The startup’s technology gives the bigger company a competitive edge to power its own growth, while that company backs the startup with not only capital but also marketing and management know-how. A real win-win!
#3 Be a lean mean fundraising machine
Fundraising is a time-consuming endeavour for founders, who are also busy getting every other aspect of their company up and running at the same time. All the more reason to make your quest for funding as targeted and effective as possible.
First things first: be clear about how much you need, and when. “It’s important to start by setting up a financial plan,” says Troch. “List all the costs involved in running your company as well as all your sources of income and funding and look ahead three years. This way you can determine how much money you need at every stage.” According to Troch the following points are essential to fundraising success:
· Idea: have you sufficiently tested your idea, or has your attachment to it created blind spots?
· Team: is your team balanced (for example, do you have both technical and sales experience)?
· Market feel: can you demonstrate your understanding of the market and potential customers?
· Track record: have you proven your market worth by raising revenue? If you don’t you’ll have trouble raising funds without giving away a lot of shares.
Your time frame depends on several factors, including the fundraising stage and your sector. Generally startups should be prepared for at least a half year of fundraising per stage. To make sure you don’t waste valuable time with less-than-serious investors, cut out those who aren’t comfortable in your focus area or who seem eager but don’t have many active investments going. Also check out to what extent they are looking for new investments and how quickly they tend to jump in.
Think you’re ready to roll? You can get on the road to financing a lot faster if you understand and anticipate investor concerns. So make sure you’re prepared to fundraise by checking the following items off your list:
· Your metrics: do your numbers support your story?
· Location: are you eyeing domestic investors, or raising money abroad?
· Type of investor: are you looking for flexible angels, or more structured VC funds?
· Time of year: are you ready to fundraise during peak times of year when investors are typically more available (hint: not on Christmas Eve!)?
· A kick-ass pitch: make sure you put in the time to prepare a quality pitch and materials
· Due diligence info: the sooner you do your homework on investors, the better.
Good luck, and may the odds be ever in your favour! Of course, we’re always there to increase your chances with sound advice, as are our great partners likeVenture Campus who can answer all your questions on innovation subsidies.