How do I fund my startup idea is a question we come across the most. You might be surprised, but investors fund only a small number of startups. They have to become investable, and the idea needs to be attractive first. But how do you get to that stage?
Will the idea succeed? Well, this is where you need to do a lot of work yourself. First you need to validate your concept. Going to a few friends and getting a fantastic response does not count. You need to do much more than that.
Usually, you see a problem, and you came up with an idea to address that problem. But you also need to think about how to make it profitable and attractive to investors.
A solution to a problem is a good start. We spoke with many entrepreneurs that have experience in different industries, and they see a problem and come up with a solution. Just think of Starling bank and the FinTech revolution how Anne Boden created a bank because the old establishment was not focusing on the customer. After 20 years in the financial industry, she said: “I had to do it. I had to create a bank”. And she addressed the problem in the banking sector.
Just how do great ideas start? They all had small beginnings. Everyone begins where you are right now with an idea and no plan on how to get there.
Startup business goes through growth stages. The first stage is to validate your idea will work. You might have already done this, and you are sure that it will be a success.
Then the next step is to build a prototype of the idea. For that, you will need funds.
These three main ways will help you fund your startup. Debt, equity or Crowdfunding.
Funding your startup through personal debt is a route most entrepreneurs take. Sometimes it’s called bootstrapping. Of course, you need to believe in the idea first and be sure it will take have traction. Ideally, you should be further than this; you should have an idea of how to get users, how to approach investors, and how to grow the business. I know, all this takes time so don’t worry if you don’t have everything at the start.
Debt means borrowing money to fund your idea. That could be through family, friends, bank loans, credit cards, governmental startup loans or even peer to peer lending. There are many ways you can raise £20K or so to fund the first initial prototype build stage.
So how far does it get you? Whatever the size of the first stage is, at the end of it you should have a pitch deck, an excellent description of your idea in a thought out series of screens, put together into a prototype. This prototype you can use to gather feedback from a more expansive test group and again use results of that research in your investor pitch deck.
At this stage, you have a clear idea of how your startup will work and how it will look. You will have feedback from testers, and you will have a prototype on your phone.
Advantages: Getting a loan is easy and convenient. If you are from the UK, then it’s not a problem to get a decent size personal or a business loan, secured or unsecured. Plus most banks will give you an instant answer with predictable fixed interest rate.
Disadvantages: Banks don’t like to take risks, so selling them an idea and a promise won’t work. In some cases you are betting you’re house or anything you owe to back your idea.
And now you are ready for the next step, the investors!
Funding your startup through equity is where you share part of your business for cash and the investor’s unique assets such as skill, experience, contacts and more. They are sometimes called Angel Investors.
But here is the kick. Investors like to see you as a dedicated and resourceful entrepreneur with a bright idea. How the app works, how will you get users, and how will you make money. Only if they like you and your idea and your plan, the investors will be interested. So make yourself investable!
Prepare well and be ready for meeting the right investor that not only cash injection but will be a partner that can guide you, help you and connect you.
Advantages: the percentage share of your company brings investors onboard. It is an excellent tradeoff for cash and skill into your company.
Disadvantages: It may be perceived as a loss of control and price you pay in future for sharing your company profits. If you don’t have the right investor on board, this could lead to significant conflicts.
But here is another way of funding your startup.
An increasingly popular way to get your idea off the ground is Crowdfunding. You convince the crowd of micro-investors to fund your idea in exchange for a limited offering of either service or a tangible product.
Think of CrowdFunding as a pre-sale process. You are creating a community around your product, app or even a game and that community are your customers. Your job is to convince them to buy from you in advance before you even made the product. So be extremely careful about what you promise and what you deliver.
Plus keep in mind that not all campaigns succeed and that you have to deliver what you promised. You have zero room for excuses and make sure you set realistic campaign goals. You need to market your campaign too, just because you create one does not mean people will start queuing to buy from you. Remember, you need to use your contacts, your marketing and convince your followers to invest in your idea.
There are, of course, other variations of CrowdFunding like rewards funding, debt funding, equity, and so on.
Advantages: a great place to build initial traction and a following. It is also an opportunity to get feedback and polish your product or service. You are turning early adopters into advocates for your brand.
Disadvantages: you are taking on significant risk and betting your business reputation. Not all projects succeed; there are no guarantees. Your idea is on public display before you make it happen.
Yes, there is another term which you might have heard of - the Venture Capital. Those are large enterprises looking for great ideas to inject large sums of money to transform your startup idea to a large scale-up. It is doubtful you will come across VC that’s interested in your first idea concept. VC companies need security and established business with revenue that you and your investor built.
With VC behind your business, your startup idea really takes off.
Advantages: achieve rapid growth through cash funds invested. Your company becomes more valuable, and usually, it’s an equivalent of rocket fuel in your tank.
Disadvantages: usually a significant loss of equity and decision making in your company.