For Funds’ Sake – How Do I Get Money?
Money, most startups don’t have enough of it but they know they need it. The more they have the more they can do, the quicker their dream can be realised and the world will be a better place. With their new found wealth and success they can buy a fleet of MacBook Airs (with a retina screen of course) and justifiably look down upon those using an ACER netbook. This illusion was shattered after chatting in Prague with Jan Sedivy, former IBM and Google employee with 18 years experience in the tech world and a career most would envy. Sedivy left the corporate world for a better pace of life in his native Czech Republic to return to academia at CTU and created eClub in 2011 as a resource, mentoring and scholarship association for student startups. How Sedivy shattered my illusion will come later, first… how do I get money for my startup?
Family and Friends
If you are lucky enough to have family and friends with extra cash (and they have forgotten about the underpants you got them for Christmas) this may be a resource for some startups depending on the investment sought. If relatively small amounts are needed it might be a viable option as long as there is clear communication and understanding and the startup isn’t willing to treat the investor any differently than an independent venture capitalist. Sedivy points out, however, that in the current uncertain European climate there would be few families, in the Czech Republic at least, with the amounts of money needed fund a startup project.
There are many new sites emerging like Kickstarter, Indiegogo, We fund and Verkami that connect many investors of all sizes with startups online, and Sedivy is encouraged by this emerging platform, “this way creates prospectors, people looking for somewhere to invest, avoids a lot of legal fees for startups but it is still evolving”. Listing with crowd funding sites is a proactive way of getting startups to think seriously about their product and how far developed it is. Ultimately, it will be the marketplace that decides just how ready it is and if the project is deserving. The downside is that many people that invest money through these sites only inject cash, there is no proactive dialogue between investor and founder which could help reveal pitfalls or problems and money could be wasted. The better the product, the more ready the product, the more likely it will reach its desired funding target or even exceed it. There is also about to be a new workforce in this area of consultants employed by startups to navigate this new form of venture capitalism, with consultants expecting to share in the capital raised if not an upfront fee. Creating a successful campaign will quickly become a very niche marketing form. Good news – because the industry is only two years old. So, it is possible to get up to speed on best practices for posting your idea. Bad news – it is going to change fast and keeping up will be essential to make your project stand out.
More and more people are getting their startup moving quicker thanks to various competition programs. According to Sedivy, “The trick to success in these competitions is that, “companies organising competitions discriminate depending on their business forecast, if you can manage that your chances of winning are better”. Germany’s Mlove contest for “mobile passionistas” won’t win you any cash but it will get you in front of influential developers and investors – you win the chance to get the chance to pitch to possible investors, while this may not appear to be ideal, consider a similar prize offered by the European Commission’s All Stars Contest when previous winners got to present in front of the likes of Branson and Zuckerberg. StartUp2 is an annual continental startup contest that has a different focus every year – for 2012 it is gaming, different types on different platforms. A great idea and product won’t get you over the line, often these contests pride themselves on being slick and simple. Many of these contests require entrants, at some stage in the process, to present their idea within a certain time frame, often around 10 minutes but it can range from 60 seconds to 20 minutes. Find the contest or contests that are right for you, not only by who is running it but where it is being run, the potential PR off the back of the contest and also the prize on offer – the prize may not always be cash but expert mentoring from someone seemingly ‘impossible’ to get access to. “Decide what you need – money, mentors etc”, says Sedivy.
Investors are like shoes, if they don’t fit right they fall off or you trip over. Lots of people have money to invest in your brilliant plan, but they are cautious and only willing to invest in very good projects. Sedivy explains that he cautious investor looks not only for the good project but the committed people – they need to know that if a project turns bad they are willing to turn it around not only for themselves but to protect the investments made. Some venture capitalists want to make fast money. They see successful projects such as apps like Draw Something and they aren’t willing to wait for years for a return on their investment. Know your investor and know their target. Don’t just seek out investors for a cash injection, recognise that the advice and networks they can introduce you to are just as valuable. This is typical of angel investors. They will usually fund small to medium enterprises and not just inject cash but expert knowledge and contacts also. Often ‘angels’ don’t seek a big risk big return strategy but prefer a more comprehensive engagement into their investment. Central Europe has a burgeoning network with sites such as the Angel Investor Association, the Central Europe Angel Club, Business Angels Czech or Business Angels Network. Sedivy iterates, “When bringing in any investor mutual trust is essential. A good investor will take time to find, six months or more. Start your search for investors in your immediate area.” Many startups gravitate to accelerator groups and collective workspaces. Many of these organisations were started by or run by investors in their own right and each with access to their own networks. Approach them and they will jump on your idea or suggest other people that might be interested. Talk to as many professional and business people you know, get them excited about your idea, attend networking events – there will always be someone who knows someone!
And then, the illusion shatters…
The most pertinent fact from chatting with Jan Sedivy is that when it comes to funding it, “hold off from needing it for as long as you can, the amount you need depends on the stages of development and what kind of project it is.” He suggests that in the early stages of development “don’t look for funding, postpone it and use as many of the free apps and resources at your disposal as you can.” Plan to stay small and outsource the areas that you are not qualified for. In this case, however, Sedivy believes that the best way is to pay cash and not to dilute the company. But if the founder trusts them, see commitment and skills that are important then back the person interested in sharing the company as that creates a bigger motivation for success. His final word on getting money to change the world with your brilliant new app or bottle top opener, “Don’t take money from investors if you aren’t committed to making a viable business.”