Do you have a great idea for the next great thing or service? Have you put together the prototype, thought through (and written out) your business plan, resource requirements and go-to-market strategy? Have you tested it out on friends and family? If you’ve answered yes to all of these questions then the last question is one of funding. How do you plan on securing the funding for launch and the startup costs to prove out your hypothesis?
If I had $10 for every time I encountered someone with affirmative answers to the first three question but a resounding blank stare and “I have no clue” response to the last, then I believe I could fund the next startup idea to cross my desk. One of the best infographics I’ve come across to explain the funding options of startups is from Anna Vital at Funders and Founders in her blog titled: How Funding Works – Splitting The Equity Pie With Investors. In addition to her awesome infographic is a nice discussion that identifies the following stages:
- Idea stage
- Co-founder stage (friends and family)
- Register the company
- Venture Capital round (or private equity if idea is big or compelling enough)
- Initial Public Offering (or acquisition)
Once you’ve hit this stage the most significant decision you need to make is “how much will you need to raise?” Chris Dixon’s blog What’s the right amount of seed money to raise? Provides the most simplistic answer:
Short answer: enough to get your startup to an accretive milestone plus some fudge factor.”
But schools of thought diverge here between raising as much as you can when you can versus not raising anything. If you go the route of raising money then stop and consider your early options:
- Crowdsourcing: there are now 100’s of sites that exist for crowdsourcing ideas. Here you basically register your idea on the website in order to solicit funds from anyone with an intent browser, the desire to say yes and the money.
- Angels: High net worth individuals have found that investing in startups can be a way to beat the standard Wall St returns but clearly with much higher risk. There is even a TV show called SharkTank that shows this in action with a lot of comic added value. Ben Horowitz has a great blog called How Angel Investing Is Different Than Venture Capital that will give you a very clear understanding of what this group can provide relative to the next.
- Venture Capital: Pretty much any hugely successful breakout company you can think of has one of the major VC firms backing them. Organizations like Andreessen Horowitz, Lightspeed, Benchmark, Sequoia Capital, and Greylock have been successful because they not only provide the funding but the experience, rolodex and advice critically needed to sidestep the inevitable pitfalls that will arise.
The alternative is to take the Lean Startup approach documented by Eric Reis in his book where you keep 100% control of your company by using your first customers to fund your startup costs.
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