12 Tips for Finding Seed Funding, Starting With a Close Look at Your Pocket
In the engineering entrepreneurship classes I teach at Villanova University, one of the most common questions students ask me is how they go about raising funds to start a venture. I am sure many would-be entrepreneurs are in this same position: they have an idea they love, maybe a prototype, but have no idea how much they really need to raise, where to find the funds and how to prepare for “the ask”.
Here's what I tell my students:
1. Do it yourself
The sooner you involve investors in the life of your venture, the bigger their control and ownership share per dollar. If you truly believe in the venture, check your own pockets first before seeking outside funding. One of the best moves you can make as a startup founder is provide the seed funding yourself. If you have savings, credit cards, a mortgage-worthy house, a classic comic book collection, or other valuable assets, you should consider it. Doing so will prove to yourself that you truly believe in your venture, give you credibility in the eyes of future investors and leave you in full control of the venture.
2. Friends, family and you
For seed level funding, I feel it is fine to approach close friends and family, as long as you are willing to invest cash yourself. If you are not willing to put up your own money, it means you are not ready. So get back to refining the idea and don’t ask anyone for funding until you are willing to mortgage your own house.
3. Don’t expect an investor to pay for yesterday
I have never seen an investor willing to reimburse founders for the number of hours they spent at the workbench perfecting their idea. To investors, past efforts don’t count, only results. It doesn’t matter how much blood, sweat, tears, time and money you’ve put into your idea, your startup’s worth is established by the investor’s belief in you and your idea. So make sure you have something of value to offer before you ask for funding.
4. You need a paycheck
Investors want to see that you are deeply committed to your own idea but that doesn’t mean you should work for free. The best way to impress your investors is to fully dedicate yourself to adding value to the startup – that is your job. You should not be distracted trying to figure out how to pay your mortgage. The investor’s job is to provide funding. Let them do that.
5. Do your math homework
My definition of seed funding is enough financial support to keep you going for three to six months, so you are ready for the next step. The “next step” could be anything from having a refined prototype to attract future investors, to putting a viable product on the market and starting the revenue stream. Do the math before you ask anyone for money. You need to be as accurate and complete in your estimates as possible.
6. Don’t over seed
Some folks feel there is no such thing as “too much money,”but I believe many startups become overwhelmed if they attract a landslide of cash. Take only what you really need. That will keep you focused and minimize your obligation to others.
7. Customers are always right
A source of funds, even better than your own wallet, is from customers buying your product or service. You may not have your own final product line yet, but you may be able to be a reseller of related products in your target market. This will allow you to generate revenue, get your name out in the market place and gain a much better knowledge of your customer.
Don't sell an early version of your own product unless you are absolutely sure you can deliver quality. Reputations, especially bad ones, rise quickly and stick like glue.
Another caution. Don’t use customer preorders to fund the startup. Besides the fact that you could get into legal trouble if you fail to deliver, your initial customers are likely to be important to you for years to come, so you need to make sure they are happy with your project and your company.
8. Don’t fool with fools
To raise seed funding, the old saying is to go to friends, family and fools. But I recommend only close friends and family and stay clear of the fools. You might convince a naïve person to invest in a half-baked idea, but even if you have the best of intentions, it is just not ethical. And who wants to deal with a fool anyway?
9. Investor or lender?
At the seed level, you are better off taking a loan than asking for an investment. Let’s face it, if you get money from family or friends, they are probably just trying to help you out and not really interested in being investors. If it is a small enough amount of money, you’ll be able to pay them back over time even if the venture fails.If the venture succeeds, you can pay them back quickly and you have not given up any stake in the company. Everybody wins.
10. All dollars are green
It doesn’t matter if the funding you put in the company is your own last dollar or funds from the richest person on Earth. You need to treat every dollar with the same care. This is your fiduciary obligation, not just a technique to show potential investors you are frugal.
11. Try crowdfunding now
If your idea is good, you are skilled at making clever videos and you have the energy and connections to wage a strong social media campaign, you can raise serious money through crowdfunding. Don’t think your idea is too small to get the proper attention. A recent Kickstarter campaign raised over $55,000 to make a bowl of potato salad.
I suggest crowdfunding with some urgency as I worry that government regulations will soon put such sites out of business. I hope I am wrong.
12. Uncle Sam is family
If you are not so good at making videos that will appeal to the Crowdfunding crowd, but have strong technical skills, you definitely want to explore funding your idea to the world’s largest customer… the US Federal Government.
But where do you start? Try the Small Business Innovation Research (SBIR) program. A 25-page proposal can land you a six-month Phase I project of about $100,000. The acceptance rate is about 10 percent, which may seem small but is much better than the lottery. If you do a great job in Phase I, you have about a 30 percent chance of winning a $750,000 (or more) two-year, Phase II contact.
Even if you do not win a contract, the rigorous exercise of writing a proposal is a great experience that will certainly help you refine your concept.