You have a million-dollar business idea. But capitalizing on this idea and turning it into a reality is a long process. The first decisive milestone being – turning your business idea into an actual startup is securing its funding. So, how to fund a startup?
In this article, I have divided the entire process of how to get funding for your business idea into three stages:
- Actualizing your idea,
- Creating an elevator’s pitch, and
- Finding investors.
The First Step: Actualization
Here is a fact for you. Investors don’t fund ideas, they fund businesses. I know it’s harsh but it is what it is.
You can’t expect Mark Cuban to fund your startup just by listening to your business idea.
You have to give investors what they are looking for – How can your business idea make them money? You have to convince them that your business idea is worth something and it will be a profitable investment.
The first step of how to fund a startup is the actualization of your idea!
Find A Partner
No matter how efficient and hard-working you are, good teams can only run businesses. You can’t possibly cover every aspect of your business by yourself. You need a partner.
Let me put in simpler terms.
Let’s say that you are a technology geek and you have a super unique mobile app idea. You know everything about the technologies you need for that particular app. You have even figured out the individual features you want in that app. But, do you know the market you are competing against? Do you know the financial milestones you want to reach? Do you know how to fund a startup?
So, if you are someone who is fit to handle the technical side of your business, find a reliable partner who can handle, say, the financial side of things.
Tip: Before finding ways to fund your business idea, look for a partner. You are going to run your startup with your business partner. Think that everything about your startup is at stake when you look for a partner!
The Business Plan
A study by the University of Oregon says,
Businesses with a well-articulated plan are 29% more likely to get funding.
Besides this, startups with a business plan grow at a significantly higher rate than those without it. Here is a FREE Business Planning Template to help you get started!
What do you include in your business plan?
Everything about your startup idea.
Here are a few points to include in busines plan to fund your business idea.
- What is your startup idea?
- What your startup is and what does it solve/do?
- What is the organizational structure of your startup?
Having said that, one of the most important points of your business plan should be its financials. What is the most common interview question?
“Where do you see yourself in the next five years”, right?
Just like your job interviews, every investor you go to fund your business idea is going to ask the same question. What are the financial projections of your startup in, say, next 3-5 years?
Most of the companies don’t make considerable profits in their first two years of business. Just do your market research and try to be as realistic as possible.
Investors won’t probably look at how profitable your business will be for its first or second year to fund your business idea. They are looking to invest in sustainable business ideas.
Tip: Documenting every part of your startup idea will help you to get funding. Besides, it will also help you to set milestones for your business and formulate strategies to achieve them.
Create a Functioning Prototype
This is the most important part of the actualization phase of how to fund a startup.
Creating a functioning prototype is all about testing your startup idea and getting feedback. Build a prototype with the essential features and present it to your audience to validate and fund your business idea.
As I said earlier, to fund your business idea, investors are looking at the impact of your product and not your idea. At the end of the say, it’s all about how your idea will perform in the market. Creating a prototype will help you convince investors that your startup idea is worth putting their money into.
The Elevator Pitch
Now that you have actualized your startup idea, the next step of how to get funding for your business idea is creating a perfect elevator pitch.
The two very essential components of your elevator pitch should be – The Problem Statement, and Your Value Proposition. These two, combined, will help you bring potential investors to fund your business idea.
Having said that, your startup pitch should be
- Quick – No one wants to hear you talk for 2-3 hours about who you are and what you do.
- Simple – Don’t describe the technology behind it unless you are pitching to a tech-savvy investor. Keep it short and simple.
- Comprehensive – It should explain the basics of your startup idea to everyone in the audience.
One of the most iconic product launches of all time is Steves Jobs launching iPhone. He said: “Today, Apple is going to reinvent the phone” and he delivered on that!
Now keep in mind that Apple was already an established company and Steves Jobs was a well-known entrepreneur. You are just pitching your startup to potential investors. Yet, Apple’s product launch is a good place to draw inspiration for your elevator pitch to fund your business idea
Tip: Don’t overcommit in your pitch. Present your startup in a true and yet, attractive way!
In the process of how to fund a startup, you have actualized your business idea and created the elevator pitch.
Well, the next step is finding money to launch your product/services in the market.
I have covered a few of them to help you understand what these options are and how they can fund your business idea!
Pursue a Grant
Business grants are offered by national as well as state governments to help startups get up on their feet. But there are strict conditions & schemes that define whether your startup is even eligible for a grant or not.
For instance, there are grants offered to women-owned businesses or other underrepresented communities. However, grants are also offered to businesses outside these specific groups. Usually, these grants are driven towards specific objectives.
Although, the grant money won’t help you completely run your business but they can definitely help you get running. Unlike loans, grants don’t have to be paid back which definitely is their most exciting feature.
Did you know that Oculus VR/ Oculus Rift was started on crowdfunding?
Oculus VR was launched with the help of crowdfunding and is now a successful billion dollar company. The Kickstarter Campaign was launched in 2012 and Oculus VR raised $2,437,429 USD (backed by 9522 people).
The Crowdfunding option of how to fund a startup is quite simple. Instead of pitching your business idea to a group of investors, you tell common people about your idea. You set different payment options and a reward associated with every option. It could be in-form of equity or some other rewards.
Here’s a snippet of a few things Oculus VR offered in its crowdfunding campaign.
Some of the famous crowdfunding platforms are – Kickstarter, Crowdcube, and Crowdfunder.
Angel Investors are actually entrepreneurs who offer capital investment for a startup for a percentage of its equity.
As entrepreneurs themselves, Angel Investors are open to risky investments if they really like your startup idea or product. Besides money, they bring their experience and resources to the table that can help your startup skyrocket in no time.
On the ground level, Angel Investors will own a certain percentage of your company for their investment.
Final Words: How to Fund a Startup?
The question of how to get funding for your business idea doesn’t have one right answer. The funding options that have worked for previous startups in your niche might not be a good choice for your startup. This is exactly where your leadership and entrepreneurial skills are put to test.
Are you an entrepreneur running a successful startup? How did you get funding for your business idea? Let me know in the comment section below!