Money makes the world go round and without doubt it’s a prerequisite of all business startups. What are the initial models which will help get a business up and running?
Silly question right? Of course you want to raise some money. Money is the oxygen which will help your new enterprise live. Lack of money will stop your enterprise in its tracks, even before it has started rolling. So thinking about money from the get-go should be at the very forefront of all new startup planning. Here’s the surprise: it generally isn’t.
When you believe that your new gizmo will change the world, it’s sometimes hard to believe that the world maybe doesn’t want to change, or even worse, that no-one thinks your brilliant invention will be of very much use. It then comes as a shock to discover that while the planning for the product launch is going rather well, thank you, there are bills and wages to be paid, and a ton of costs coming down the line. Money is needed, but where’s it going to come from?
Buy a hat
One approach is to go to the nearest thrift shop and buy an old hat. Any style will do. Now drop into your local bar, and go around chatting to everyone, asking them to drop some cash into the hat to support your new business. It might just work, and you may even find that you need a bigger hat. One advantage of this approach is that for sure it will sharpen your ability to make a great Elevator Pitch, but it’s very time intensive, and the income isn’t likely to be great.
This is however the basis of the ‘Friends and Family’ method of supporting a new business, and very many startups get their first boost in this way. Friends and family are probably not giving their money on strictly investment terms, but because actually they know you, and perhaps even love you! They are giving money to you as a character, an individual who they want to support and see do well in life. And it’s not just money that Friends and Family might contribute – Uncle Bill offers his workshop to mock up a prototype, or Aunt Mary keeps the startup team fueled with coffee and muffins around her kitchen table.
Appealing to the crowd
The friends and family approach leads logically to the next stage, where an emotional connection is still an important part of the investment impetus. This is the crowdfunding model, in which the enterprise appeals to an existing ‘fanbase’. Having fans is a huge advantage for any organization because they are enthusiastic, they spread the word about you, plus they tend to forgive you if you make a mistakes (which you will). The origins of crowdfunding actually go back to 1850 when the French philosopher Auguste Comte called on his readers to help with the costs of publishing a new book. In 1997 the first modern version of Crowdfunding made its appearance when the rock band Marillion appealed online to their fanbase to support a tour, later using the same method to underwrite albums.
Crowdfunding works, because it leverages an existing base (also helping to grow that base), and usually addresses a very specific goal, such as recording an album. The success of Kickstarter, IndieGoGo and other crowdfunding sites has helped huge numbers of startups to gain traction in the world. Because there’s still a ‘heart’ connection from investors, they are usually quite forgiving if things don’t work out as planned, and often their investment seems more like a donation to a worthy cause! The downside is that it’s usually only small amounts of seed money, not serious capitalization.
The idea of seed money is a good one, and it’s very important for startups to distinguish this from long term methods of raising money. Friends and family or crowdfunding will very likely only yield enough for the business to get going. These methods will never deliver the full arc of investment which will take the startup all the way to being a fully functional business with products or services to sell, so don’t pin your hopes on this. The other likely place to attract seed investment is therefore from an Angel investor. This is someone who is definitely ‘in it for the money’ and is looking for returns, but at the same time shares some of the enthusiasm or niche admiration that friends, family and fans display. Angel investors are often found in the arts fields, such as theatre and film, but there are specialists in all forms of enterprise. The good thing about Angels is that often, having seeded a project, they’re willing to put more money in and stay on for the longer term as the business ramps up.
See it in steps and stages
I said that thinking about where to get the money from should be considered from the very beginning by all startups, and the surprise is that this isn’t usually the case. My advice - don’t start with the millions, the ICOs and STOs, the far-away vistas of huge wealth. Yes, those things could well come to you, but always see investment into your business in steps and stages, and above all be disciplined and realistic about how you will raise the money, in what amounts, and at what stress points your budgeting will be tested. Buying a hat and passing it round your local bar will only get you so far, and your plan to attract investors has to take you all the way. - All the way to crushing success that is.
There’s a lot more to say about attracting investors, and in due course, I’ll be saying it!
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