4. Funding Sources
No two entrepreneurs are the same so it follows that people will follow different paths in bringing their idea to market. But one thing is true for everyone - it involves significant amounts of money!
So, it makes sense at the start of the journey to understand some of the possible sources of this funding and how and when to access it.
We really don't recommend re-mortgaging your house to get your idea off the ground. However, it is definitely worth thinking about what financial resources you have available. Putting some "skin in the game" has two effects:
- it elevates your personal level of commitment to the idea
- other funders will see that you have put your own money in before asking for theirs
But before you spend any of your own money make sure you have a plan for what it is going to cost to get to the end of the process and where the rest of the money could come from. Then you can prioritise what things warrant your own cash.
Too many entrepreneurs we have met rushed into paying for a logo, a website, some pictures of their idea or even a patent. Then they realise they don't have the resources to get to the next milestone and what they spent their money on doesn't unlock the next stage.
There's no hard and fast rule but we think these things can be worth self-funding:
- a Prior Art search from a company like Venture Proof which will help you understand if there are any restrictions around your idea due to existing patents
- research trips to meet potential customers for your idea
- setting up a limited company and the digital accounting service to support it (vital for any grant funding applications)
- an initial stage of design and technical scoping to understand the challenges that need to be overcome
Most countries provide access to grant funding that is designed to help small businesses work on innovative ideas. Governments recognise that early stage development is risky and many companies can't justify the spend.
Grants are usually designed in the form of competitions that businesses pitch for and will be structured around the areas that each government needs to see some significant impact in.
Typically, this includes advances in health, energy, infrastructure and so on. If you can sell your idea in a way that will have an impact on these areas of interest you may be able to achieve some grant funding.
The main advantage of this funding is that it does not require you to give away any equity in your future business but it also provides credibility for future investment.
If you are in the UK you can find out about the current opportunities for grant funding on the InnovateUK website.
Whilst grants are usually aimed at early stage development of new ideas there is another scheme for ideas that are further down the line.
Innovation loans allow an entrepreneur to borrow a certain amount of money that only becomes repayable once the company is successful. This is a relatively new addition to the funding sources available through InnovateUK.
There are also all kinds of non-government loans for startup businesses. Check out the Virgin StartUp website for information on their scheme which has helped many new businesses.
Raising money to develop your idea through Venture Capital (VC) is too large a subject to cover here. There are many different forms of VC funding from the very early stage (often called Angel investment) through to Series A, B, C, etc.
The important thing here is to recognise that if you raise money from investment in this way the investors expect a return and will usually secure that in the form of a percentage of your business. It's very easy to get in a knot over investment so it's worth finding some good sources of information.
We recommend the following:
- read Venture Deals by Brad Feld and Jason Mendelson
- work through the guides on the Seedrs website
- read the Fundraising Fieldguide (available for a donation to a charity)
- go to some pitching events where you will hear how other entrepreneurs present their ideas
- learn about SEIS and EIS tax relief for investors which will make your business more attractive
At its inception crowdfunding enabled entrepreneurs to get their ideas out to a large audience online and find people willing to fund developing the product from scratch.
After a few notable cases where companies crowdfunded for an idea that they had no capability of delivering the crowdfunding platforms now require product ideas to be backed up with a working prototype of some sort.
in addition to this the platforms are so over-subscribed with ideas a campaign needs to achieve something like 30% of its funding goal in the first few days in order for it to rise above the noise and attract significant numbers of supporters. This can only usually be achieved through effective marketing in the months leading up to the launch of the campaign or through some kind of pre-commitment from a "tribe" of willing supporters.
Crowdfunding is definitely a very effective way to fund certain stages of bringing a product to market. But remember that you need to have the resources beforehand to:
- get to a working demonstrator
- carry out effective marketing to secure your "tribe" commitment
- produce materials to make your campaign stand out including a video
The other advantage of crowdfunding is that it amplifies any marketing you are already doing around your product. The platforms enable you to reach a much larger audience than you would do normally.
Like Venture Capital funding there is too much detail to go into here so we recommend using the resources available online such as The CrowdFunding Centre.
So, you've got your value proposition sorted, worked out what resources you need and figured out the most appropriate funding sources. Now you need to work out how to get your idea out of your head and into reality.
Click on the button below - Step 5 Product Design