There’s always going to be a sizeable gap between the inspiration for a new invention and seeing returns from the first sales. The path to a successful product launch is a costly one. Like the hero in a fairy tale, the entrepreneur has to overcome obstacles in order to succeed in their quest. Unlike the fairy tale, many of these obstacles are financial.
Product design, development, and marketing can be expensive. Securing the funding necessary to take your invention to market is, for many entrepreneurs, one of the trickiest parts of the product development process. There are various different strategies for procuring funding, and each has their own advantages and drawbacks.
Bootstrapping: Funding it Yourself
Bootstrapping is the startup term for self-funding. While this method doesn’t get the same kind of press coverage as angel investors and venture capital, it can be a successful model for launching a startup, and many successful businesses were started by entrepreneurs who put up the seed money themselves.
Obviously putting up your own capital comes with a particular kind of risk. If you fail, then it’s your own money on the line: the risk will not be distributed, and it will all fall on you. But the flip side of that is that you maintain complete control over your business.
A bootstrapped startup is not beholden to any outside investors. For some people, this in itself is all the justification they need to go the self-funded route. When you give up equity to investors, you lose some degree of control over your business. If being your own boss is a major motivation for you, then maintaining complete control might be worth the financial risk.
Bootstrapped startups that are well-managed have the advantage over investor-funded businesses of being more nimble and flexible. You only have your customers to answer to, you don’t need to spend any time at all courting investors, and you don’t need to spend time waiting for approval before making decisions. This is all time that can be put towards responding to customer needs and improving your product.
Bootstrapping does not mean that you will never deal with investors. Self-funded startups tend to grow more slowly and gradually at first — entrepreneurs tend not to be willing to engage in high-risk/high-reward behavior when it’s their own money on the line. But once you’ve established a comfortable customer base and are paying the bills and have demonstrated the stability and potential of your business, you may find that investors are now interested in you. This can be a major advantage, as the bootstrapped startup has more leverage now in dealing with potential investors than you would if you were seeking seed funding. The investors now don’t hold all the chips.
Of course, all this comes at a cost — quite literally. Bootstrapping is only an option for entrepreneurs whose day job, as it were, allows them the flexibility to develop their business while also earning the money to launch it. It’s not an option that’s available to everyone, and it’s not available for every startup, either. If you’re a launching a software startup, the seed capital you need might not be that much. But if you’re a hardware startup, the initial costs might be more than you can handle financing yourself, in which case you may have no choice but to pursue one of the funding options below.
Bootstrapping can be a great option for those who can afford it and who are content with more gradual initial growth.
Crowdfunding
In the world of startup financing, crowdfunding is the new kid on the block. Crowdfunding gives a platform for entrepreneurs who might not otherwise have access to the kind of exposure crowdfunding makes possible. Crowdfunding allows you to reach out directly to the community to pitch your idea. You get your funding from your potential customers, which serves the double function of spreading the word for your product while also raising the funding you’ll need to actually produce it.
Crowdfunding is a powerful tool, but money is never free. A successful crowdfunding campaign takes work, planning, and investment.
Pick the right platform
There are a number of crowdfunding platforms available today. Kickstarter and Indiegogo are the most well known, but there is a host of others. Different platforms have different policies, strengths, and weaknesses. For example, Kickstarter is known for having a particularly high success rate for creative projects, and they famously require that 100% of the fundraising target be met, or you don’t get to keep any of what was pledged.
While Kickstarter is known for having a fairly high success rate for creative projects, they require that 100% of the fundraising target be met, or you don’t get to keep any of what was pledged. On the other hand, Indiegogo, which is becoming a popular platform for raising funds for all kinds of personal projects and causes, allows you to keep whatever you raise even if you fall short of your goal. But you’ll have to pay them a higher percentage of the funds raised in exchange.
There are also somewhat less known crowdfunding platforms that are more targeted towards entrepreneurs and startups. Peerbackers is another rewards-based crowdfunding platform specifically catering to entrepreneurs. They take a bit more of a hands-on approach than other platforms. Entrepreneurs submit proposals which are then reviewed by Peerbackers staff, and then posted to the website for the public to invest in. They take a 5% cut. They also run the Crowdfunding Academy to help entrepreneurs develop their crowdfunding skills.
Equity-based funding platforms like Angel List and Grow Venture Community combine elements of conventional investing with crowdfunding. Rather than being open to the public, these platforms connect approved projects with accredited investors. Unlike conventional investing, though, the investors on these platforms are able to invest smaller amounts, and so still pursue a kind of pooling model characteristic of crowdsourcing. Unlike the more well-known crowdfunding platforms, these investors claim a stake in the equity of your project, rather than investing in exchange for rewards.
Equity-based crowdfunding platforms are much more selective than the more popular reward-based sites. Do your research, and figure out which model is most appropriate for you and your startup. See what kinds of projects are successful on different crowdsourcing platforms, and launch your campaign on the site that suits your project.
Setting appropriate rewards
If you do go for the conventional crowdfunding platforms, it’s important that you select appropriate rewards to entice investment from the community. You need to plan this carefully. The rewards you end up owing to your contributors will end up being a major part of the cost of running the crowdfunding campaign.
The rewards you offer are a lot like presales. The money you’re raising isn’t free, it’s sort of like an advance. This is something important to remember about running a crowdfunding campaign: these aren’t donations or handouts. While this investment doesn’t come with equity arrangements, it comes with costs that need to be factored into your accounting:
- You need to have developed your product to a level where you can convince the community to get on board,
- you need to invest in a quality video,
- and you need to invest in worthwhile rewards.
All this takes time, and cuts into the funding that you will (hopefully) raise.
When coming up with rewards to offer your backers, consider what it is about your pitch and your story that you think is will resonate with the public. Don’t just offer free stuff: offer part of the story! Your backers will want to feel like they are contributing to something great. Try to see it from the perspective of potential backers, and ask yourself: what’s in it for them? Your rewards should be compelling and valuable, and should complement the story you’re telling. Which leads us to…
Crafting your pitch
This is an integral part of any funding campaign. You need to sell yourself, your product, and your story to your potential funders. With crowdfunding, you aren’t selling equity in your company, so you don’t need to wow people with your profit forecasts and growth strategies. What you need to do is tell a compelling story that makes people want to get on board with your project. You need to convince them that the world needs your product, and allow them to be part of making that world a reality.
Venture Capital
Venture capital is maybe the most iconic form of startup funding. Many inventors and entrepreneurs dream of wooing a savvy and successful venture capitalist with their brilliant new product, immediately solving all of their financing troubles. We think of powerful investor in their pinstripe suits and fast-paced meetings. In actual fact, though, venture capital is only available to a very small percentage of startups — somewhere around 0.05%.
Venture capital can be great, for those who are eligible. Venture capitalists are interested in investing large sums of money into businesses with the potential for huge returns. This is big business: venture capitalists are not interested in modest growth or healthy revenues: they want to see a return on their investment in the multiples. It’s a high-stakes world, and exponential growth is the name of the game. VCs are typically only interested in high-sum investments, usually in the millions.
Even though venture capital is talked about a great deal, it actually represents a very, very small portion of the startup field. The vast majority of startups never receive any funding from venture capitalists — in fact, the vast majority will never even meet a venture capitalist. Because they are dealing with such high-stakes investments, VCs typically only deal with businesses that are well-established and can demonstrate strong potential for rapid growth. They are extremely selective with whom they invest in.
Venture capital has the advantage of bringing with it a huge influx of cash, but this comes at a cost. The investment usually comes with very strict organizational requirements, usually involving a seat on the board of directors (which means you need to have a board of directors). The goal is usually for a spectacular exit — that is, a massive IPO or buyout from a major competitor.
The funding that comes from VCs means a significant sacrifice in control over the company. But, it can pay off in a big way if you fall into the extremely narrow criteria for receiving it.
Angel Investors
Angel investors are much more involved in funding startups than venture capitalists. If you aren’t bootstrapping or relying entirely on crowdsourcing, there’s a good chance your goal will be to win over an angel investor or two.
Angel investors are wealthy individuals (and usually accredited investors) who essentially buy equity in emerging companies. Though they are called angels, this isn’t really an act of charity: many angels have made fortunes over smart (and lucky) investments. Don’t let the name fool you: it’s a business. Major success stories for angel investors include Uber, Airbnb, Twitter, and Instagram.
Angel investors are much more nimble than venture capitalists and are considerably more flexible when it comes to the type of companies they will invest in. Unlike VCs who are typically looking to pump millions of dollars into a business, angels usually invest $25,000 – $100,000, though it’s no unheard of for them to invest more.
This money does not come without strings attached. While the requirements set forth by the investors will not be anything as stringent as with VCs, you can still expect to include your angel investors in your major business decisions. The flip side of this is that many angels are themselves successful entrepreneurs, and will often act as mentors to you as you develop your company.
Your investor pitch is the most important tool you have for winning over angels. Remember that angels are human beings — they are human beings that are interested in ROI and profits, but they are people. Your investor pitch needs to both show them that you’ve got a handle on your financials and connect with them on a personal level.
Angel investors are often interested in more than just the pure abstracted profit potential. They want to get involved with projects that they think are worthwhile and will make them money. Like with crowdfunding, your story is going to be an important part of the package that you are selling to the investors.
Credit and Loans
This is maybe the least flashy option, and is not one that is talked about as much as the other funding models in a lot of business media, but good old-fashioned credit and loans can be a perfectly acceptable way to launch your business.
The biggest difference between a loan and an investment is that you’re on the hook for paying the loan back no matter how successful your business becomes. So, you do take on a bit more personal risk. But, in the long term, a bank loan can actually end up being the cheapest money you can get.
While you will have to pay back the loan with interest, those payments end once the loan has been paid off. Equity, on the other hand, is paid out indefinitely — usually forever. Investment banks also will not exert the kind of control over your business that you can expect from angel investors and especially VCs. If you’re the type who is strongly independent but lack the resources to fund the venture yourself, then a bank loan might just be the solution you need.
Because you end up being on the hook for the loan at the end of the day, you need to be diligent in making sure you have the financials worked out.
But this, of course, is true no matter what funding option you go for. It can’t be stressed enough: there is no such thing as free money. Whether you’re relying on support from the crowd, or are looking to impress an angel, you need to have a compelling pitch that will separate these potential investors from their money. You need to convince them that the world needs your product, and that they will benefit from investing in you.
This means that you need to have a product worth investing in, and you need to have a good pitch. Cad Crowd offers a range of product design and development services for entrepreneurs to help you bring your product to market. From industrial design to prototyping to packaging design, we offer the services you need to impress investors and build a great product. Get a free quote today.