Funding Alternatives Change as Your New Venture Grows

Some entrepreneurs start polling venture capitalists for that multi-million dollar investment before they even have a business plan. That’s like trying to sell part of something to a stranger for big money when you haven’t fully defined it yet. It won’t work, it costs time and money, and hurts your credibility when you need them later.

Every entrepreneur needs help and support along the way, from developing the initial idea, to selling off the successful business (exit strategy). The challenge is finding and using qualified affordable support organizations for each stage. Don’t waste your resources on the wrong ones.

It’s helpful to think of startups as proceeding through several stages, which I have defined some time ago from a funding perspective. Let’s take a look here some similar stages from a support perspective:

• Idea stage. The first step toward a business with any idea is to write it down, and build a business plan around it. If you need help at this stage, look for a local university teaching online courses on entrepreneurship, or how to build a business plan. The alternative is to work with an innovation institute to evaluate your technology, or hire a consultant. If you need money now, is has to come from friends and family.
• Early or embryonic stage. The most common support organization at this level is called a startup incubator or accelerator, and these exist in most countries, usually sponsored by a university, local government organization, or even local individuals. Usually these will not give you money, but will provide inexpensive expert mentoring and office services.
  Their real value is your access to senior advisors with experience, and other startups in the same stage. Sometimes these will ask for 5%-15% of your equity for their support services. They are not trying to make money, but simply to recoup their costs over time.
  Separately at this stage, you may look for small funding amounts from angel investors, called seed investments. Funding of $25,000-$250,000 may be available from angels, who are private individuals spending their own money. The incubator organization can help you find them, or show you how to apply for a government grant.
• Funding or rollout stage. This is the time for you to step out on your own, find office space, and open your business. Once you have some traction, you can approach venture capital organizations, with funding amounts of $1-10 million for the real rollout, often referred to as the “A-round,” or first institutional funding.
  Support organizations at this stage are usually professional financial advisors, or investment banks, which have nurtured relationships with institutional investors. These usually charge you a fixed fee up front, and then perhaps a small percentage of the raise.
• Growth and exit stage. Companies at this stage must have a large market, good traction, and be focused on scaling infrastructure and market adoption. This normally means more than 30 employees, and more than $1 million in revenue. Support organizations are investment banks, similar to the preceding stage.

As startups pass through each stage, they need to use support resources wisely to minimize costs, wasted time, and maintain credibility to support movement to the next stage. Typically, they must also change and tune their executive team, to keep up with the increasing demands of a growing company on process discipline and sustainable success.

Obviously, if you bootstrap your business, you can avoid all the investment implications, but you still need a business plan and professional support. Otherwise, not paying attention to the expectations associated with each stage will likely jeopardize your business success. Do it right and enjoy real progress in each step of the journey.