“The only true wisdom is in knowing you know nothing.”Socrates
The startup founder journey is likely one of the most interesting in today’s society. In the beginning, it is an extremely lonely one. The initial spark, the idea that eventually leads to the startup, comes from something you see, but nobody else can. Whether it’s a better way to do something, an improvement on an existing product, or something entirely new, you are alone in your ability to see a different future.
This can be maddening, as nearly every founder has people – typically some very close to them – who either don’t understand the vision or don’t have faith that the would-be founder can make it a reality. This can sometimes make the founder feel alienated, but in those high-performers, who eventually find success, it also has the potential to be one of their strongest motivators.
You may never say, “I can do it, you just watch me,” out loud, but most of us would be liars if we said that thought had never crossed our minds as entrepreneurs.
Whether it’s you alone or in conjunction with a co-founder, the initial startup founder journey can be extremely lonely. A search for validation of the idea, forging a path to build it, and finding the funding to do so is typically a solo venture and something the founder must do on their own. If the founder is wise enough to know their limitations and bring outside mentors or experts to assist in their journey, the circle widens as others join their cause.
Perhaps a team is brought on board to help facilitate building the startup, and a product is eventually made and released. Suppose it finds great success, as we all hope our ideas will. In that case, the founder is suddenly besieged by crowds who want to know about their story, their product, what caused them to see the world differently than everyone else, and how they persevered against all odds to build the world they envisioned.
In those initial days, weeks, and months before the founder widens their circle and brings in outside opinions or insights, it can be extremely difficult to ascertain the best next steps. You know how to build the product, but how do you build the business? Who can you trust to advise you on the best path forward?
As the startup ecosystem grows, there are more options than ever for startups seeking mentorship, assistance, and funding. To help early-stage founders understand the possible next steps and outside assistance for growing their fledgling startups, we’ve put together a list that outlines the various options available to a startup founder today in terms of fundraising, mentorship, guidance, and programs that can facilitate building their startup to have the highest potential for success.
What Are A Startup Founder’s Options?
Due diligence is an integral part of the initial days of a startup that too few people take seriously. Your idea may seem completely novel and new to you, but it is a large world out there, and startup ecosystems full of innovative entrepreneurs are popping up all over the planet. In an ever-connected world, there is the potential that a startup on the other side of the country or even the planet has already developed the same or a similar version of what you envision.
Due diligence needs to be performed not only on the Total Addressable Market (TAM) and how big your potential slice could be but also if other companies, startups, or entrepreneurs are providing or working to provide the same product or service you are envisioning.
If you approach any level of investor and they have a better idea of your competitive landscape than you do, they will most likely send you away with no funding in hand. Knowledge is power when developing your business plan and concept for your company. Knowing exactly what type of competitive environment you are walking into is paramount to your initial success, and that can only be achieved by comprehensive research.
However, there is a limitation to what can be gained from your own research. While it will go a long way to understanding your competitive landscape, understanding the business needs will be limited unless you have already started and built a successful company in this specific space. That is where outside counsel in the form of other options further down on this list will come into play.
Friends and Family Funding
Even if you opted to bootstrap and keep your 9-to-5 job while building your startup, a time will likely come when the financial needs to grow your company will outpace your abilities personally. If you have friends and/or family with the desire and wherewithal to help your business to succeed, they may be able to help provide the funding to build your MVP or hire someone that can help you do so.
Jeff Bezos is one of the wealthiest men on the planet now, but when he left his bond-trading job to begin building Amazon, he did so with a $120,000 investment from his parents. Not all friends or family will be willing or able to do so, but if yours do, it can benefit a fledgling startup.
If you choose this option, however, do it the right way. As the old saying goes, “Contracts keep friends.” You don’t want to let money or business get between you and your important relationships, so anyone asking friends or family to assist in funding their startup would be wise to clearly define the terms in the deal upfront. Will they receive equity for their investment, or is it purely a loan? What is the expected timeline for repayment? What can they expect back from their investment?
While it is extremely difficult to accurately forecast the timeline to profitability for a startup in its early stages, this is a great time to develop that skill. If your startup finds success, customers, and a need to scale quickly, you will find yourself in front of many different investors who will ask the same questions. Why not practice honing those skills on the people you most love and trust?
There are two main, high-level ways for a startup to gain funding: debt and equity. A loan is one type of debt, and if your startup finds great success, it may one day be able to issue bonds, which are another form of debt-based fundraising. However, let’s not get ahead of ourselves just yet, as that is an ability reserved for mature companies. The other way to raise money is through equity, in which you “sell” partial ownership in your startup in exchange for an investment.
Early startup founders need to be scrappy and resilient, and sometimes they don’t have the option to raise money from friends and family, and their startups are nowhere near the ability to issue bonds yet. If your belief in your idea is solid, and you need to raise money but aren’t prepared to offer equity, some founders may take out a bank loan to get their early startups going.
Unfortunately, large traditional banks are typically not interested in the risky venture of investing in early-stage startups. They may participate in late-stage funding once a company has proven itself, but they aren’t likely to get in early. Local or community banks, however, may be inclined to do so, especially if you are a customer and your company would bring potential jobs to the community.
Some founders may not have created a formal business or can’t secure a business loan, so they opt to take personal loans instead. If your credit is high enough or you have equity in your home, a Home Equity Line of Credit (HELOC) or personal loan could provide the funding to get your startup going. Consider these options carefully, however, because if the startup does not succeed, it could damage your credit score tremendously or risk home foreclosure if you opt for the HELOC.
A relatively new option in the world of startups is equity crowdfunding. During his presidency, Obama changed the regulations which allowed non-accredited investors to buy equity in startups. This paved the way for the various equity crowdfunding platforms today, allowing regular people to buy tiny fractions of equity in startups rather than putting in hundreds of thousands of dollars at a time.
Even newer are ICOs and STOs, which are blockchain and crypto-based fundraising options. If you know little about this technology, you should avoid this option altogether. There are a lot of decisions to be made about the specific tech and platforms through which you place your offering, and the wrong choices can lead to poor outcomes. If you understand the crypto world, however, some startups have found great success through this method.
However, a significant warning needs to be given for any type of equity crowdfunding venture. Venture Capital and institutional investors do not like buying a stake in companies that have chosen this route because there are so many different owners who each have a small fraction of ownership in the company. Remember that equity equals ownership, which means that thousands of different people could potentially have a right to their own ideas for how the company should go forward.
For mature companies listed on the S&P 500 and with an entire corporate infrastructure, that is one thing, but it is something else entirely in a new startup still seeking market traction.
Angel investors may be seen as the bravest investors in the startup ecosystem because they typically invest in startups in their earliest stages. Because they know the risk involved in investing so early, angel investors need to be given an extremely strong reason why your startup is worthy of investment.
Understanding how to tell your “founder’s journey” story is critical when pitching angel investors. As your startup likely has few to no customers to show success metrics, an angel investor is truly investing in their belief that you have what it takes as a founder to build success based on your view of the world.
There is an additional benefit to finding an angel investor that goes far beyond their financial abilities. Along with (partial) access to their bank account, a savvy and successful angel investor will provide you with access to their Rolodex, network, and knowledge.
An angel investor’s business focuses on early-stage startups, and many of them focus on sectors and startups in which they already have some expertise. They may have already watched and assisted numerous startups in growing from the idea stage to funding and customers, meaning they understand the roadmap to finding success.
There are plenty of databases available that can help you find contact information for angel investors or groups out there. A wise founder seeking an angel investor will search for one with the financial wherewithal to help fund their startup and the experience and a proven track record of success within their niche.
If you are a founder with an idea that needs to be nurtured, developed, or market-tested, an incubator may be your best next step. An incubator will often provide a working space for you and your growing team in which you can be co-located with other startups, have an actual office address that isn’t a coworking building, and spend your days working around others who are sharing the same experience of building their startups.
The office space isn’t the main selling point of an incubator, however. While both incubators and accelerators have timelines within which a startup must progress, an incubator often has more of a sliding timeline (typically up to a year). The main benefit of an incubator is the access to outside consultation with experts who can help the founder develop aspects like their business plan, find the right product-market fit for their startup, or validate their idea.
An extremely well-named enterprise, an incubator is built to incubate a startup. Mentors, experts, and sometimes even investors are present and available through an incubator to help take your startup from its initial idea stage to the point where it is ready to “hatch” through an MVP or market offering.
Incubators typically charge fees to participate in their program but do not require equity – although, with the growing number of incubators in the market, there are plenty of different business models and programs.
While the incubator is designed to help the fledgling company find its way to customers, the accelerator does exactly what its name suggests – it accelerates the company to prepare for full funding and/or entrance into the market.
Many accelerators will require that a startup already have an MVP developed before they begin the program, will be on a much tighter timeline than the incubator (typically 3-6 months), and will have a demo day at the end of the program where founders must demonstrate their product to potential investors.
Accelerators may have far stricter application requirements for their programs. Some pay the startup during the program and either directly fund or introduce the startup to likely investors when the program ends. The mentorship and expertise in a good accelerator are not focused on merely developing an idea into a startup but instead on bringing the nascent startup from the prototype (MVP) into something that can either be released on a large scale or is prepared to do so with adequate funding.
Because the Venture Capital business model is based on finding startups that have the potential to provide a high Return on Investment (ROI), seed accelerators tend to prefer aggressive growth tech companies that have a very large TAM. A VC firm isn’t interested in investing a million dollars in a startup that may be able to find a profitability of $1.5mm within three years or more. VCs want to find a startup that can take a $2-5mm investment and turn it into $100mm or more.
Statistically, that doesn’t happen very often, and the success rate for that business model is around 10%. As a startup founder considering the pipeline from an incubator to an accelerator, however, you must understand what they are looking for so that you can appropriately set your expectations.
If your startup only has a small potential market and is seeking a marginal share of its revenue, the incubator and accelerator pipeline may not be the correct path for you.
Straight to VCs
Founders who have done their due diligence and gone through the histories and case studies of some of the most well-known tech unicorn startups (the FAANG stocks) may see that those companies didn’t follow the traditional incubator and accelerator pipeline, so they may choose to court VCs directly. This is a brave decision and not one that has a high likelihood of success.
While it’s not oft-discussed outside of Silicon Valley and VC circles, networking and introductions are often crucial aspects of a startup finding funding. You may think you have the greatest idea ever formed, and everyone who hears about it believes it will change the world.
Unfortunately, there are thousands of those types of ideas that are rejected by investors every month. Take a moment to consider some of the largest VC firms like Kleiner-Perkins or Sequoia, and how many emails, messages, or phone calls they receive daily from startup founders in need of funding.
As you can imagine, any organization with that type of volume of incoming traffic would require several layers of gatekeepers to filter through it all and ensure that only the best ideas are brought to the founders. Inherent in any type of organization with gatekeepers, however, is that some of the best ideas risk being deleted because they weren’t explained in a way that caught the gatekeeper’s attention.
It’s just a fact of life and something that founders searching for funding need to understand. These firms reject far more offers than they accept, and the lion’s share of pitch decks never even make it to those who have the ability to make an investment decision.
The incubator and/or accelerator pipeline helps founders in numerous ways. Still, those seeking high-level funding receive perhaps the most valuable asset that any could ask for facetime with investors looking for the best startups. This may seem trivial to the outside observer or new startup founder, but access to investors and networks may be the greatest asset of a good accelerator or incubator.
If developing a good idea into a successful startup were easy, everyone would do it. It’s easy to imagine that millions of great ideas are formed but never brought to reality yearly. Among those great ideas that strike the entrepreneurially-minded, only a fraction will progress into startups.
Within those that form into companies and offer their products, roughly 10% will fail in the first year, and another 70% will fail before their 5th. Statistically, the startup world is a perilous journey, but there are choices that the startup founder can make to help tip the odds in their favor.
Establishing a strong network and surrounding yourself with experienced mentors is as important as building the product. No matter where your expertise lie that helped you come up with the idea for the startup, there will invariably be numerous decisions you will be faced with that fall far outside your experience and expertise.
While there are funding methods outlined above that can help a startup founder attain capital when needed, incubators and accelerators offer far more than merely a path to funding: they offer expert guidance when & where it is needed.
If you are a startup founder looking to change the world into your vision of the future, you must first start with the quote by Socrates from the beginning of this article: “The only true wisdom is in knowing you know nothing.”
Even if you haven’t come to a decision point in your startup experience that fell outside your expertise yet, you certainly will. The wise founder begins with the understanding that they do not know everything and are sailing into uncharted waters, so they surround themselves with experts who can show them the way.