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The Two Must-Have Elements for Attracting Startup Funding

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Editor's Note: Entrepreneur's Ask the Expert column seeks to answer questions about everything from starting a business to growing one. To follow the column on Twitter -- and ask a question -- use hashtag #ENTexpert, or leave a comment below. Your query may be the inspiration for a future column.

The Two Must-Have Elements for Attracting Startup Funding
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Q: We have a business plan that we are constantly improving, but we are having a hard time meeting people who could connect us with an investor. In order to implement our ideas and progress, we require funding. How would you approach this phase of a startup?

-Jabber Vaan Al-Bihani
Brooklyn, N.Y.

A: This question can really be broken down into two parts. First, the business plan. We live in an age where startup costs have been drastically reduced from what they might have been in the dotcom era. Between Amazon cloud services, open API's and web sourcing, like Github, and offshore development, it's not unreasonable to have a working alpha software product for under $10,000. I believe this amount of money can reasonably be raised through personal savings, friends and family, credit cards or even, if required, a second mortgage.

Related: Looking to Raise Capital? Exhaust All Your Options.

As a result of these developments, early-stage investors rarely make investments based on a business plan. Investors can get a sense of the talent and scrappiness of the founding team by what they can produce with limited resources. Having an alpha or prototype at least gives investors something tangible to evaluate and a working version of your product to test. That's a much better indicator of what will come when there's a fully built-out product, not to mention it's easier to invest money if you've at least experienced a part of what you're investing in vs. just having someone tell you about it.

On top of that, Google AdWords and Facebook ads are an inexpensive way for startup founders to tap into their demographic and begin gaining some sort of traction. It also demonstrates that someone is interested in the product and what that value proposition is. Plus, it shows you already have some marketing chops.

Related: When You Raise Capital, Think 'We' Instead of 'Me'

If you can achieve building out a version of the product, collecting a small amount of data to show your market exists and you have a solution to a problem, then it will tell investors way more than any business plan would.

The second part of this has to do with meeting investors. As the old adage goes, "if you want advice, ask for money. If you want money, ask for advice." This is absolutely true in the VC world. You can't expect to get something without giving a little, so you have to start with a softer approach and try to go in "warm" whenever you can. By "warm" I mean you should tap into your network, and if possible, avoid sending a bunch of cold emails to strangers.

Network as much as possible and look for the people who are knowledgeable on what you are working on, either from an industry, technical (product) or online marketing perspective. You'd be amazed at how much thought and effort has previously been undertaken in what you're attempting today. You can either learn from that or possibly find out that there's a way to build upon what has already been done.

In a sense, networking and asking for that knowledge or advice serves two purposes: First, you'll gain expertise that allows you to avoid recreating the wheel. Second, if what you're working on genuinely solves a meaningful problem, then those people who have the expertise you seek will notice and want to get involved. Whether they invest directly or want to introduce you to people who will invest directly, it's a win-win.

Have a question for YE’s experts? Submit your questions in the comments section below and those with the most likes from other readers will be answered. On Twitter, use the hashtag #YEask. Include your first and last name, your location (city and state) and the name of your business.

The author is an Entrepreneur contributor. The opinions expressed are those of the writer.

Paul Lee is a partner at Lightbank, a VC firm focused on see and early-stage tech startups. Prior to joining Lightbank, Lee was the managing director and group head of digital at Playboy Enterprises and the founding partner at Peacock Equity Fund, a joint venture between NBC Universal and GE Capital.

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