How to fund your first Startup – the 5 B’s


Guest post by Colette Grgic from BlueChilli

 

You’ll never forget your first.

There’s something really magical about your first startup. It’s like your first love. Your first heartbreak. It’s tough, but it’s got to be done.

Once you’ve committed to take action and work on your own thing, one obstacle that trips founders up is funding. Knowing what your options are is the first knee over the hurdle, so let’s take a look at how you can fund your first startup: Bootstrap, Beg, Borrow, Bedazzle or Buy.

 1.     Bootstrap – DYI

“To bootstrap or not to bootstrap, that is the question…” And it’s a tough question that often divides a room of entrepreneurs straight down the middle.

On the one hand there are many valid reasons for not taking investment: you want to avoid outsiders meddling in your business or forcing you down routes you don’t want to go down. Taking investment might require you to do more regular and robust reporting (not a bad thing, really). You might also be faced with the pressure of losing someone else’s respect if you lose their money. If the idea of these things brings forth an image of Mordor, then bootstrapping your new venture is your best option, providing you’re in a position to do it.  To bootstrap, you’ll need to dig into your own pockets possibly alongside continuing working for a paycheck while moonlighting on your startup.  Not even the most talented entrepreneurs have all the skills required to go at it alone, so you’ll also need to convince the right team members to join up and contribute good ol’ sweat equity.

The downside of bootstrapping is speed. With limited time and resources to allocate to your startup you will inevitably stretch out the time it takes you to validate, build and launch. And once launched, if you’re not 100% committed you might find that you can’t grow fast enough to warrant working on it at all. It’s not the case for all, but given that 90% of startups fail before commercializing their products it is a definitely possibility.

2.     Beg – Friends, family and fools

If bootstrapping isn’t an option for you or not feasible in terms of developing a prototype or MVP for your startup, then finding some cold hard cash is going to be your next port of call. However, if you’re very early stage and a first-time entrepreneur, chances are you will more than likely have trouble raising funds from usual investors who prefer investing in experienced teams or ideas with proven traction in the market. A more realistic route is that you’ll have to go knocking at friends and family who believe in your capability and want to support you. Although you’re no doubt frothing at the mouth at the prospect of receiving opium (OPM – Other People’s Money), the last you need is sympathy cash – it will give you a false conviction about the viability of your idea. Make sure that you don’t take money from fools. Rich aunties and uncles who have made their money by being smart business people, sure. But money you get from fools will cost you more than it is worth.

Some things you want to consider (and have sober conversations about) before taking money from those close to you is how your relationship would change if you lost their money. As in all of it. Every last cent. Although nobody sets out to achieve that, it does happen. I recommend that you write up a short contract outlining how much each party is contributing, what the money is for, what you intend to use it for and what the expectations for repayment, if any, are. If you are dishing out equity in your company I recommend that you properly incorporate and register the shares and ownership with ASIC. But most importantly: never take money from anyone who isn’t willing to lose it.

3.     Borrow – loans

If money from friends and family is a little too close for comfort, then you can consider taking out a loan from a bank. While most banks claim to support new business ventures, very few are able to amalgamate the experimental nature of a startup into the box-ticking requirements for a loan. And the paperwork is a nightmare. Talk to your bank and shop around if you’re convinced your startup has a shot at a bank loan.

If you’re more of a cowboy then you might consider applying for multiple credit cards and then systematically maxing them out one by one. I really can’t recommend it. For so many reasons.

4.     Bedazzle – crowdfunding, competitions and concessions

Slather on the charm, bribe your best designer and video maker friends and get ready to explore crowd-funding! Platforms like Kickstarter, Indiegogo and StartSomeGood will allow you to post your project and ask members of the public to fund your idea. Easy, right? You just  put together a (professionally produced) video and some (well-thought-out and desirable) rewards, right? Oh, and a landing page, which needs a logo and design scheme. And of course you’ve already got your social media followers ready to pounce on the opportunity? Because they read about it in that one article that you begged a blogger friend to publish because the other hundred journalists you contacted didn’t care. Right? Do not fool yourself, a crowd-funding campaign is a beast of an undertaking. And read the stats: even on Kickstarter which is the most successful of the platforms for startup and tech products, tech projects only reach a 32% funding rate.

Alternatively, if you’re the charismatic kind who only needs a stage in order to sell ice to an eskimo then happy days: you’ve got a shot a getting some funding through pitching competition prize money. It won’t be much though, the average prize money hovers around $10K (if that) for some of the more prestigious startup competitions in Australia.

If you’re hitting that chicken-and-egg problem of not being able to pitch in competitions because you don’t have the resources (time, skills, money) to develop even a prototype, then take a look at the Innovate NSW MVP Grant which can get you $15,000 to develop and test your startup idea. The Victorian Government also provides Innovation  and Technology Vouchers for $10-25K that you can apply for. If you’re based anywhere in Australia, it’s also helpful to understand the new Accelerating Commercialisation grant scheme for startups.

Once you’re getting further into development you can also make use of the R&D Tax Incentive. This tax break gives you a refund of 45 cents for every dollar you spend on research and development of new technologies or products. So if you’re in NSW and you spend your  $15K MVP grant on development, you will receive $6,750 back from the tax incentive program, which totals your funds to $21,750. These do have to be development expenses, so heads up that salaries and marketing expenses aren’t covered through this! All the startups we work with maximize their funds in this way and when you’re developing more complex products for around $50-75K that extra 45 cents for every dollar goes a long way!

5.      Buy – Investment

Investment money comes in all shapes and forms but the fundamentals of it is that you buy someone’s liquid money (cash baby!) in exchange for a share in your company. There are plenty of blogs and information about raising money from angels and VC so we won’t go into this here (and anyways, see #2 Beg for why these might be out of your reach).

One overlooked option that is attainable for new companies is looking towards corporate partnerships to provide not only financial support, but also strategic opportunities for growth.  This could very well be a life saver for early stage startups with awesome products or technology that rely on a density of users to gain momentum. The Disrupt@Scale program for example is made to support early stage startups with corporate funding and scaling opportunities. You don’t need to have a company incorporated or a team committed, you can apply with only an idea – four startups will then receive $75,000 investment each to test, develop and scale their ideas with up to 12 million of the sponsoring corporate’s customers. Compare that to $75,000 that you could perhaps scrape together from your savings, family support, grants, competitions and a loan.

 

If you’re working on your first startup and you’re reading this article because you are genuinely looking for solutions to make your idea come to life, then a huge congratulations to you. Keep at it, ask questions, learn fast.  And good luck!

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