Funding comes in phases.
Understanding these will help you know when and where to go for funding at each stage of your business. In addition, it will help you communicate with financiers more accurately. What you think of when you hear “seed financing” and “A round” might be different from what investors think. You both have to be on the same page as you go.
First stage of money
The first stage is first money, When cash is invested in exchange for large amounts of capital. This cash, which ranges between $ 1,000 and $ 500,000, typically comes from the three F’s: friends, family and (we don’t like this nomenclature) scams. The latter names are essentially “giving” cash, and these investors are well aware that they will probably fail – hence, “scams”.
Your first investors should reap the greatest benefits because they take the most risk. The assumption is that, ultimately, you will do well or improve your investment. The reality, I understand, is that you probably aren’t.
Your first bucks can come from bootstrapping or F&F, and your first big checks can come from a accelerator which pays you about $ 50,000 for a fairly large stake in your business. Accelerators are essentially greenhouses – or incubators – for startups. You wonder about them. If accepted, you get assistance and a small amount of funding.
Why do investors give the first money? Because they trust you, they understand your industry and believe you can succeed. Some are curious about what you are doing and want to be close to the action. Others want to close in case you are successful. In fact, many accelerators have this in mind when connecting with new startups. At its core, the funding landscape is surprisingly tight. When you start fundraising, you will hear a lot of terminology including descriptions of various financing categories and investors. Let’s talk about them one by one.
As the old saying goes, if you need a helping hand, you’ll find it at the end of your arm. With this proverb in mind, let’s start with bootstrapping.
Bootstrapping comes from the concept of “pulling yourself up by your own bootstraps,” a comic image that computer scientists have adapted to describe how a computer starts from a boot state. In the case of an entrepreneur, bootstrapping is synonymous with sweat justice – your own work and money that you put into your business without outside help.
Bootstrapping is often the only way to start a business as an entrepreneur. By bootstrapping, you will soon find out how much you are personally invested in your idea.
Bootstrapping requires you to spend money or resources for yourself. This means that you either spend your own money to build an early version of your product, or build the product yourself, using your own skills and experience. In the case of service companies – IT shops, design houses and so on – you are required to quit your day job and invest, full time, in your own business.
Bootstrapping must be a finished action. For example, you should plan bootstrap for a year or less and plan to spend a certain amount of bootstrapping money. If you spend your time or your balance sheet with little to show for your efforts, you should probably dismiss the idea.
Some ideas take very little money for bootstrap. These companies require sweat equity – that is, your own work on a project that leads to at least one minimum feasible product (MVP).
Consider an entrepreneur who wants to build a new app-based business in which users pay (or will pay) for access to a service. Very basic Apple iOS and Google Android apps cost about $ 25,000 to build, and can take up to six months to design and implement. You can also create a simple, web-based version of the application as a startup effort, which often requires a lot less money – about $ 5,000 to $ 50 an hour.
You can also learn how to code and build your MVP yourself. This is often how technology companies start out, and it says a lot about the need for founders to codify or at least be competent in the technical aspects of their business.
You can’t bootstrap forever. One entrepreneur we met was building an appointment app. He had dedicated his life to this dating app, spending all his money leaving his job to continue building. She slept on the beds and told everyone she knew about the app, networking within an inch of her life. Years later it’s a dead app in an app store containing millions of dead apps. While this behavior could yield results one in a thousand times, few entrepreneurs can survive for a year of app-induced hardships, let alone years.
Another entrepreneur we knew was focused on nanotubes. He spent years rushing here and there, wasting money on flights and holding meetings with people who wanted to sell services. Many smart investors have told him that he should go and work internally at a nanotube company and then branch out when he was ready. Instead, it attacked all angles for years, eventually leading to fatigue. There is still to this, however, that is a testament to its intensity.