People with great ideas need money and resources to help them build companies and succeed. The battle for early stage capital is fierce, but understanding the nuance in the process can be helpful to more mindful targeting and an informed approach. We have outlined ten easy steps to help you evaluate what sort of capital best fits your early stage company.
1. Start with knowing what stage your company is in. Are you still in the idea phase or have you built a prototype? The further along you are the easier it will be to raise money.
2. Understand how you will make money in the future. You need at least a basic revenue plan before you seek to raise capital. What do you offer? How much will customers pay? How many customers do you need to break even, and where will you find them?
3. Decide if you need to test your idea. We recommend rewards-based crowdfunding as you can develop your idea without giving away equity. You can ask for orders of your new product and receive the cash you need for a manufacturing round. Supporters like friends and family who want to contribute to your success can also do so at a much lower level than angel or institutional investors. Crowdfunding is the first step in the chain of capital raising, as you can see on the chart below.
4. Rewards-based crowdfunding is a great way to further your business before going on to other rounds of funding. You will build an active relationship with your supporters, demonstrate traction, and have the opportunity to refine your product or mission after this experience. There is no equity given away and the process is low risk.
On Plum Alley, we have interactive technology and customer support to help you succeed in your rewards-based crowdfunding campaign.
5. Venture capitalists will ask if you have completed a successful crowdfunding campaign as part of their due diligence. Why? Because it shows you know how to sell your product, and your customers want it. The hustle on a CF campaign is easier than raising outside angel or VC money, and it shows you have the drive to succeed.
6. After you have a product and demonstrate that customers will pay, then consider angel investors. The amount angels fund will be enough for you to get your company off the ground to build a team, acquire users and get press. Choose your investors wisely. If you can find investors with domain expertise like technology, that is the best.
7. After you have built your product, have paying customers and a team, it is time to consider VC funding to accelerate your growth. There are many sources of money but they are not equal. Beware of investors who are not aligned with your vision and offer to help but don’t deliver. Check the references of investors and VC firms. In most VC firms, the ratio of companies to VC partner is 50 to 1. You can imagine how much time they will actually spend on your company until there is a problem.
8. Outside funding is certainly powerful and will help your company grow. However, outside capital is not a business model. You need to know how you will make money in a long term, sustainable way. Data shows that out of new companies that start each year, less than 1% receive venture dollars. This is because most business are small or sustainable without raising outside VC money.
9. Small Business Loans or other special programs are an option as well.
10. Consider joining an accelerator program that will jumpstart your business. There are many accelerators that help you establish your business but they take a chunk of equity for their help. Most accelerators are intensive for 3 months. The quality of each accelerator varies and most can be helpful in making introductions to VCs. But keep in mind in an accelerator you are competing with the other members in your cohort at demo day.
If you are a female founder, we have created a chart for the sorts of programs worth considering for accelerators, angel investors, and VCs.