If you’re running a startup I’ve got one important bit of advice: you will never have enough funding. You will (and should) always be looking for your next source of funds. Well, maybe never is a bit over the top, but never is a good benchmark during the first five years of any startup.
Making your money last is one of the most important concepts for any early-stage company. One of the biggest reasons startups fail is they run out of capital. Early-stage money is extremely limited. Let’s look at the primary sources for early-stage funds. There's 1) self-funding by the entrepreneur, 2) friends and family financing, 3) grants and awards, 4) angel and venture capital and 5) crowdfunding.
Of these funding sources, which can you access first? Which do you control? Self-funding is your first source of capital followed by friends and family. You have the greatest control over these two, the other sources of funds are managed by individuals or institutions outside of your control. To access grant and awards you need to have made significant progress on your idea and business plan along with providing some of the initial start-up capital. It’s not impossible to access early-stage capital without putting in an initial investment, but if you haven’t put in your own cash it can be a big negative. Venture capital and crowdfunding are only possible after you have a proven track record.
The funding scene is complex and rigorous, so any money coming in needs to last. Here is how you can do that.
Don’t quit your day job. And if you don’t have one, get one! If you need to fund yourself along with your startup, you’ve doubled down on the risk that you will run out of capital – significantly decreasing your odds of success. By not having a “day job” during the early stages of your startup, you have eliminated your first source of funds and likely reduced your ability to effectively utilize friends and family funding. If you’re dependent on your family to fund your daily living expenses, they won’t be able to fund your startup. If you’re taking out debt to fund your living expenses you’ve reduced your startup run time—your time to the “valley of death” will be much faster. Most startups hit the valley of death within the first two years. You’ve put everything into your idea, you’ve tapped out your family and friends, and you can’t find additional capital from investors. You are likely pre-revenue, which is why you have difficulty raising capital. Unlike family and friends, investors need more than a good story before they invest. Remember, no matter how good your business plan may be, it does not represent proof to investors. Investors will need to see a track record of success and a clear path to revenues along with a strong case for a positive cash flow in the not so distant future.
Add resources instead of paying for services. A key to self-funding is having resources on your team rather than buying services. Let’s say you have a great idea for a service delivered through software applications, but you don’t have software development expertise on your team. You’ll spend a lot of your early-stage funding buying your software development and in turn, increasing the odds you’ll run out of capital. This concept holds true for other areas of expertise, like marketing, product development, business planning, financing. I know you think the value of your idea is so great you don’t want to give up equity by adding team members, but sharing equity is one of the best ways to ensure your success. Think about it, if your business needs the resources and you find a good match that is willing to devote their time, expertise and maybe some capital to make the business a success, what is the downside? A good friend of mine always reminds me that it’s better to have 20% of something than 100% of nothing.
Don’t spend much on IP at the start. You certainly do need to have a strategy on how your idea can be protected, but an IP strategy can be developed with little or no capital. I have seen a lot of entrepreneurs spend a big part of their initial funding on IP development, only to run out of funds before they had a viable business. In the end, they didn’t make it and the IP has no value. If you have to choose, it’s better to have a viable business with limited IP protection than IP protection with no business.
Build an advisory board. This will add immediate expertise to your startup. Putting together a strong advisory board—with a varied background—to provide business advice and technical knowledge is an important part of your development plan and a big asset when looking for additional funding. At the start, a formal advisory board is not necessary, but you do need to have informal advisors to bring creditability to your business plan. As you grow, a more formal advisory board will be necessary. Potential investors think of an advisory board as one of the tools effective startup companies use to manage business risks.
Dive into the resource pool. Northeast Ohio has a robust entrepreneur ecosystem. Before you ask for a dime from any investor, link up with one of the accelerators or incubators. The Entrepreneurs-In-Residence at JumpStart, Youngstown Business Incubator, Akron Global Business Accelerator, Braintree Business Development Center, The Incubator at MAGNET, Akron BioInnovation Institute, BioEnterprise or the Northeast Ohio Medical University are knowledgeable resources at little or no cost—it’s a no-brainer. I watch 30 to 40 entrepreneurs pitch to the Innovation Fund for money every quarter. And those who have worked with an EIR have an advantage over those who haven’t. The assistance they receive is more than just how to make their presentations better; it’s about their business plan, IP strategy, market research and competitive analysis. There are always a handful of entrepreneurs who haven’t connected with a network resource. For me, this lack of connectivity is concerning. Startup success is difficult. It requires a lot of help from many sources and not taking advantage of existing resources points to a lack of preparation for me.
Doing the above won’t guarantee success, but it will improve your odds of success significantly. If your idea is good and supported by a strong business plan, you already have the key elements for success.
John Rastetter provides oversight for Innovation Fund Northeast Ohio’s award agreements and quarterly reporting for the fund. He advises applicants on their business strategy and the overall application process. He works with the recipients to finalize their award agreements and project milestones. He has 39 years of experience in various financial positions focused on manufacturing operations, budgeting, forecasting and strategic planning.