Who will invest in your startup? [Part 1]
Maybe you’re still bootstrapping or maybe you have started to dip your toes in the water of third-party capital pools. Now, however, you are widening your search to some of the most common early-stage sources of capital, such as your immediate circle of friends and family, and local angels, incubators, accelerators and micro-VCs. Explore how and which of these sources can help you extend your runway and get access to the capital you really need to grow and scale your venture?
The first thing to understand when thinking about who you want to raise money from is the idea of “First who, then what.” Who is the right match for what you are offering? Specifically, you need to think about what’s in it for the investor. Why would they want to part with their capital to help you achieve your dream?
It’s also important to recognize that although money is theoretically a fungible commodity, it’s not true that all money is equal. Actually, some money comes with value-add; some money comes with strings attached. But this is the next step. First, we want to think about what kind of investors exist and how you might choose between them to decide who is best: best for you and best for them.
Friends, Family, Fools
Everyone knows that when you’re starting a business, the people who love you the most may think it is a crazy idea and may try and convince you not to do it initially. But once they get over it, they may say, “Okay, actually I do support you.” That’s why friends, family and ‘fools’ are typically the first outside capital source for many startups. ‘Fools’ would be people who, for whatever reason, want to throw money in at this early stage but aren’t really professional investors.
And all of these possible investors have one thing in common: they’re essentially supporting the entrepreneur because they like the entrepreneur. They’re supporting the entrepreneur because maybe they even love the entrepreneur. In other words, they have a personal relationship with him or her. This source of venture finance money tends to be the least sophisticated in general.
Crowdfunding
Equity-based and debt-based crowdfunding are now legal in many countries, so you could seek to raise capital through crowdfunding in the form of equity (investors looking for upside in the form of capital gains and/or dividends) or debt (lenders looking for a return on investment in the form of interest and repayment of principal). There is also crowdfunding based on awards (pre-sales of products or prototypes) and philanthropy. Crowdfunding can be a great way to “test the waters” with your idea, but it’s not easy and it requires a serious investment of time and money to be successful.
Business Accelerators
Business accelerators have become popular sources of funding. An accelerator typically is part of a cohort, a fixed duration program — maybe 90 or 120 days — and it comes with a host of services such as mentorship, training, business support services, some pre-seed capital (say, $20,000-$150,000) culminating a type of “commencement ceremony” or “demo day” to an audience of prospective investors. The pre-seed capital is frequently in the form of convertible debt or something similar like a SAFE or a KISS. Well known examples include Y Combinator, 500 Startups and Tech Stars which hail from the USA, Startup Bootcamp which hails from Europe and Startup Chile in South America.
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