How to raise funding for a prototype
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In the context of a startup, a prototype should be anything that will help you to demonstrate that not just the product, but also whether the intended users of the product are actually as excited about the product as you are. A prototype is something that allows you to test the various assumptions that you have made for your venture.
A prototype has to be a very basic version of your product – just enough to give your consumers a feel of what you are building or something that will demonstrate that your technology or innovation actually works.
Most aspiring entrepreneurs with ideas often tend to seek angel investors or venture capitalists (VCs), to fund them at prototype development stage. That is, however, unlikely to happen in most cases. Investors investing at a power-point or pre-prototype stage are very rare.
How should aspiring entrepreneurs deal with the funding needs for even building the prototype? Here are some thoughts:
Keep the costs at bare minimum.
Often entrepreneurs who are at the prototype stage make the mistake of taking on costs like office space, capex like hardware, etc. While a comfortable office is good to have, but at the prototype stage it makes sense to optimise and focus costs only on the key objective – i.e. building a damn good product.
Also, at the prototype stage, it is not necessary to build all the features and certainly not the frills that make the product look good. A functional prototype that helps the intended audiences experience the product and get a feel for the use-case is sufficient.
Take on only those costs that help you deliver on the sole objective of proving that the technology/innovation works and/or that consumer find it useful.
As best as possible, try to bootstrap and make the prototype with your own resources.
Try to build the prototype on your own rather than outsourcing it to an external agency. Angel investors or VCs are unlikely to provide funds for building a prototype. At the very least, they will expect you to go into the market, talk to a reasonable number of customers/users and get the evidence that what you are building is indeed going to be liked by the market. And in most cases, you are likely to need a prototype to get that evidence.
In most cases, I have observed that the costs of building a prototype is really a lot lower than what the entrepreneurs estimate. Often, you will be able to convince a vendor or partner to provide their service/components pro bono or low bono, perhaps with the commitment that you will give them either a higher value after you raise capital or giving them nominal equity in lieu of their services.
Despite keeping costs to a minimum, if you need to raise some capital, try to take help from friends & family.
Family & friends are indeed a relatively easier pool to tap into. There are several examples of entrepreneurs raising their initial capital – very limited fund raise – with small co-investments by a number of people including ex-bosses, ex-colleagues, ex-business associates/partners, family members, relatives, friends, etc.
Bring money from friends and family who trust you and are giving you money for your entrepreneurial journey with mid and long-term returns.
The trick is to manage this round with the level of rigour, maturity, discipline and governance standards as you would do with an institutional investor. Do the documentation well, explain the risks and potential rewards well, help them understand the terms, set clear and easy to understand term-sheets, have a good share holder agreement, etc.
Many entrepreneurs feel shy of asking family & friends. However, it is not as if you are asking them to donate for a cause. You are giving them an investment opportunity in which you are staking your opportunity cost because you believe that the concept will have a good monetary upside.
If family & friends does not work for you, instead of approaching angel investor groups or VCs, try approaching individual investors who may have an interest in your space.
After you explore your first circle of family & friends, instead of angel investors or VCs, it is prudent to explore individuals who may have an interest in your space.
You may also have an opportunity to get some funding from corporates who may have a strategic interest in the product or service you are attempting to make.
For Example - If you are building a healthcare app, someone who owns a pharma company or a hospital may be interested in investing in the venture. Or, if you are building a logistics startup, someone in the retail or logistics space may be interested in the concept.
Put in your own savings
Nothing demonstrates your commitment and belief in the venture than you putting your savings into the game.
In any case, do not raise too much money for a prototype.
Focus on building a good, basic product. Keep it simple. Keep it low-cost.