No matter what phase your business is at, you’re probably going to need external funding to help you manage your working capital and investment for growth and there are now many options for seed and series funding aimed at helping your business grow.
If you’re not already involved in the start-up world, there are three key funding phases.
- Seed funding. At this stage, investors are looking at a business which a product or idea which is ready to launch, so has a minimum viable product, clearly defined marketing and sales channels and a properly structured operations plan. Funding can come from angel investors, small VC’s or crowdfunding.
- Series funding. This is the growth phase of the business, it’s set up with a strong team in place and is looking to scale it’s market and product portfolio. There may be several funding rounds as the company grows with money coming from VC’s or accelerators in return for equity.
- Exit round. Traditionally this was the IPO round, where capital is released from the business through listing on the stock exchange, but this could be an acquisition.
But what about before you start?
What is pre-seed funding?
A business takes money and resources to get started before an investor will even look at your business seriously, so where does the money come from to fund this?
Pre-seed funding has traditionally been entrepreneur lead, and 80% of businesses are still set up with funding from their owners, who typically put in around $10k to “bootstrap” their businesses. However, there are other options.
The Pre-seed stage.
As any entrepreneur or small business owner will tell you, the hard work starts long before the business is set up. This is the R+D stage during which you’ll be checking out your idea, researching the market and developing your business model and product prior to the initial launch.
You’ll need to be able to define your market, demonstrate your solution’s unique fit with the markets pain points, identify how you will monetise your business and show a proof-of-concept or minimum viable product.
Where can pre-seed funding come from?
Bootstrapping is still the most common source of finance for new businesses, where the owners use their own capital to provide funding and resources for the growth through its initial stages.
In many cases, the initial work will be done by the owner in their spare time whilst still in full-time employment, but there are limits and this is high risk, especially if you’re working in a similar field, or for a company that has specific IP or anti-competition clauses in its employment contracts.
In any event, there will still be a capital requirement if you need to buy stock, secure premises or involve third parties in developing your product.
Friends and family Pre-seed funding
Many owners secure funding from their sphere of influence, utilising friends and families as sources of cash or resources, and this makes a lot of sense, especially if you have contacts with specialist skills or free cash.
However, business and pleasure don’t mix well, so it’s worth treating your circle like external investors. Give them a proper pitch and make sure you have an agreement in place which clearly defines the terms of the arrangement and what both parties expect.
Many local and national governments promote private enterprise and will provide access to grants, loans and support for relevant businesses throughout their development.
As an example, Ireland is one of the best countries to do business in and is very startup-friendly offering a wide range of supports for potential exporters and employers.
Ireland is a small island nation with a small population and therefore limited domestic demands it needs to build export markets in order to grow economically.
Start-up support begins at a local level with each council providing resources, training and grants to promote small business creation and growth. Local enterprise offices provide access to micro business loans, feasibility and business expansion grants aimed at creating jobs and economic prosperity in the local area.
For larger businesses, especially those with export potential, Enterprise Ireland provides seed funding and venture capital finance programmes helping business to grow as well as feasibility and collaboration grants and funds, incubator and accelerator support, plus access to a wide range of in-country offices to promote local networking development.
Once you are set up, support is also available to minimise the cashflow impact of taxation, with relief available for entrepreneurs investing their own capital into a start-up and relief on corporation tax for new start ups.
MicroVC’s, Incubators and competitions
The current low investment environment has shifted investors away from low-risk vehicles like bonds and into higher risk opportunities, but in order to secure higher returns they need to diversify their portfolios away from a reliance on high-value stocks into venture capital.
This influx of funds has created a range of pre-seed options for new businesses more suited to the embryonic stage of a new business. Unlike traditional VC or Banking approaches, application and acceptance can be much easier, but this comes at the expense of either higher equity, lower investment or higher interest rates, reflecting the greater risk to the investor.
Pitch competitions give entrepreneurs the chance to fine-tune their pitch before they go into the market, often with capital or a place in an accelerator or incubator as the ultimate prize.
Obviously some VC’s and Angel investor networks also carry pre-seed funds, but these can be difficult to reach and may require an introduction and follow a more rigorous application process.
How to attract funding
No matter what the source or external funding, you can expect the process to be rigorous and competitive. At the very least you will need to have a good pitch and a strong core team and a proof of concept for your product will usually help.
Most pre-seed investors are not expecting a fully realised business though, so don’t feel you need to boil the ocean, the concept should be enough to attract investors if it’s obvious how it will heal the pain points.
Your business plan needs to focus not on how big you think you will be, but how you will deliver in the short and long term. In product terms that means two things
- Be aligned with the customer’s pain points. Pain points are areas crying out for a solution and therefore in high demand from consumers and offering a real competitive advantage. The more benefit you can delver the more the customer will value your product, safeguarding revenue and helping you attract switchers from traditional products
- Ease of access. No matter how good your product is, if the customer can’t access it easily, they won’t buy it. Simple marketing, product design and delivery are the hallmarks of the fastest-growing companies from Airbnb to Uber
The longest journey starts with a single step
Most pre-seed funding is designed to get you to the next level, not to IPO, so your business plan needs to focus on what you want to achieve in the next 6-12 months.
More to the point, business changes so rapidly that what you expect to do in a year’s time may be totally different to what you have to do once you get there. You will develop too and your experience, outlook and skills may well take you off on a different route to get to the ultimate goal.
Many investors are looking for evidence that you can actually deliver on the expectation, not just sell a great idea, so have a clear roadmap of activity to get you from A to B, let alone Z.
Your vision may be to be the next Stripe, but what do you need to do today, tomorrow and next month in order to get there? Consider each phase carefully, outlining why it’s on your roadmap, how you are going to achieve it, and where you’ll go from there.
Develop authority and awareness
Authority is a key concept in online and offline marketing. It’s a realisation that what you say is credible, reliable and trusted and can have a significant impact on whether your message is received and accepted.
In digital marketing, Domain authority is the currency of SEO and dictates whether your page is top of the pile or hidden below the fold. In content marketing, it defines whether your articles and blog posts are shared or ignored.
As you set up your business and look for funding, widespread awareness of the problem you are solving allows you to position a solution much easier. This lets you create hype and interest in the domain before you bring your product to the market, and if done correctly, means you will have created an audience primed for your commercial message in advance of the launch.
Be the expert
Ideas don’t make money, delivery makes money. Investors are looking for a business leader that can see, build and deliver solutions which meet the needs of a large addressable market. They don’t just want to see that you can come up with ideas, they want to know that you can create and implement a coherent and effective plan.