Looking For Funding? Check Out These Tips For Startupe_darrellj | Mar 28, 2014
Occasionally we invite clients to discuss issues of importance to those who engage freelancers on Elance. Here are some thoughts from Nicholas Wright. He frequently hires freelancers and is one of the founders of AppInstruct, an online Course that teaches people how to create an app utilizing the Elance platform.
Earlier posts in this series have looked at how to turn your idea for a new mobile app, into an app and explored the concept of minimum viable product.
This week, we’ll run through the various startup funding stages you may require to progress through the development of your idea, from concept to launch and on to success.
The 3 Fs – Friends, family and fools
These are likely to be the first port of call, to get your idea off the ground. They may require equity for their funding, or be happy to provide you with a loan (on favourable or no interest terms) to get you started.
Okay, so the important thing to note here, is that an incubator is not an actual investor, they will not give you any funding. Rather, incubators provide co-working space in commercial premises on monthly terms at reduced rates, so you can be there one month, and gone the next. They’ll provide the space for you to work together as a team and, importantly, they’ll expose you to a network of other startups and consultancy businesses, whose experience and expertise you can learn from, and whose own journeys you can share. The hub is a global network of such spaces, so you may find them in your own city.
Seed round - accelerator ($Up to $50k)
In most of the main cities of the World, certainly Sydney, Berlin, London, New York and San Francisco, there are accelerators. These accelerators run programs throughout the year where you pitch your early stage product to them, and if successful they will provide you with a small amount of funding (up to about $50k) as well as expertise, contacts and support to test that product over a compacted timeframe to establish whether it might succeed or not.
The most famous of these is Y-Combinator, which is based in Silicon Valley.
So, hopefully you now have an established team and a product on its way to being proven (some first customers). This is where an angel or team of angels can come in.
Angels are wealthy individuals who have an interest in the startup space, money to invest and hopefully business skills and contacts that can help you succeed. This latter point cannot be stressed too much. At this round, a good personality fit between a founder and the angel, may make a crucial difference to being successful.
It’s important to remember that the angel is making an investment, not providing a gift. They both want and expect a financial return on their funding, so they will expect you to have a product and a plan that supports such an outcome. Your angel will be looking for you to have an idea of potential exits within 5 years, and will weigh trade sale opportunities more favourably than IPOs (the availability and success of which are dependent on more factors, than your own success).
They’ll also look to negotiate the maximum possible amount of equity for that investment, but won’t expect you to just roll over. The $/% will depend on your potential valuation, but they’ll be looking for between a 7.5-30% share of the company.
One thing worth asking your potential angel, is whether they have the ability to fund further growth beyond this round. Some angel groups have also established sidecar funds, which may elect to provide the next round of funding on their favoured investments. Access to such funds may ensure your continued growth.
Among the most famous of all angels is Ron Conway, who was one of the first investors in both Google and Facebook!
Venture Capital – ($500k-$5mil+)
To be here, you’ll have built and launched your first product, established product/market fit, have proven methods of attracting customers and will be earning revenue (although you may not yet be profitable). If the earlier rounds have essentially served to validate your idea, this round will fund your growth.
The leading names in Venture Capital include Kleiner Perkins Caulfield & Byers (investors in Elance), Benchmark Capital, Andreessen Horowitz and Sequoia.
In our next post, we’ll discuss the different legal entities you may operate your own business within and the best ways to structure the equity interests.