After having a great idea, the goal for most founders is to get some money through the door. Ideally, every business would fund its growth and development through revenues (i.e. sales to customers) but unless you are able to produce a product or service overnight there is an inevitable delay between when you have the idea and when you are actually able to make your first sale.
With this, almost inevitable, delay, it is necessary to think about other sources of funding to grow your idea. Thankfully, there are typically lots of different opportunities for obtaining funding including friends, family, and fools (the founders themselves?), grants, accelerators, incubators, angel investment, venture capital, and private equity to name but a few.
At SimplyShow.me we obtained funding from:
- Founders, through sweat equity and private consulting
- A Government grant through the fantastic ACT government Innovation Connect Program
- A grant from ANU Connect Ventures through their Discovery Translation Fund
- Angel investment
From the founders side, I was able to fund my initial work on the idea by taking private contract and consulting positions. From my experience, this is a typical way for entrepreneurs to pay their bills when they first start a company. This approach seems like a great idea but in my experience it is very distracting, consuming a lot of time and energy and consequently not giving you time to focus on the idea you actually want to be working on. That being said, if this is the path you go down, try and get contract and consulting work that at least gives you some relevant expertise that you can leverage to grow the idea you are working on.
If you do end up taking consulting or contract positions and unless you are starting a consulting business, or consulting in the exact area that your start-up is focussing on, you should keep the consulting private (i.e. not through the startup). You can always contribute money you make through consulting to the company, but its a bad look to have unrelated consulting activities in the same entity as the start-up idea itself.
After this initial bootstrapping phase, SimplyShow.me benefited significantly from equity-free grants, one from the ACT Government ICON program, and one from ANU Connect Ventures through their DTF program. In both cases the grants (for amounts between $25-50k) were intended to help commercialise an idea and for SimplyShow.me they funded initial software design and development.
In 2011 when SimplyShow.me received the first grant, from ICON, I was a six months out of my PhD, had $5k in the bank and was doing a little bit of teaching to pay the bills. This grant gave me the spending power to start developing and growing the idea into a company. Without it, I have no doubt that SimplyShow.me would never have existed.
Our final source of funding was private angel investment. I found the process of seeking angel investment to be an interesting experience. Without sounding too disparaging, I found that most angel investment groups contained a lot of tyre kickers. Because of this it takes a considerable amount of effort to understand who was worth chasing and who was only interested in talking because they themselves were interested in learning about the investment scene.
That issue aside, I found the process of dealing with interested angel investors to be very rewarding. They were very supportive, eager to engage and willing to spend time to truly understand the business and our vision. I also found that they were happy to do deals that were simple and on reasonable terms. Most investors we spoke to were happy with a reasonable valuation, willing to take ordinary shares, most did not want a board position and all were willing to be as active as needed.
I found that many angel investors were investing in a ‘pay-to-play’ model where they invested to get some exposure to the start-up scene without necessarily seeing it as a way to make their fortune (I sure hope not anyway). Thankfully, they were also very understanding as our bank balanced dwindled and commiserated with us over a beer when the company finally went pop.
Although we never pursued accelerators and incubators my feeling is that they are great for young entrepreneurs with little or no exposure to the start-up scene. My cofounders and I all felt that the limited funding they provided and the potentially onerous (depends on your perspective) conditions (equity, location, etc…) they imposed were not really what we where looking for. That said, I know many entrepreneurs who have been through these programs and loved them.
Finally, and although we never proceeded, we also spoke to both private equity and venture capital firms. Firms investing money from a small number of high net worth families or individuals invested in a similar way to angels, albeit using a more formal due diligence process and having a willingness to invest significantly greater amounts of money. Terms for these firms struck me as being more formal than typical angel investments but far less stringent than investment terms from more typical venture capital firms who are investing on behalf of a larger number of smaller investors, or investing on behalf of corporate entities.
In the case of some of these more typical venture capital firms we saw investment terms which were excessively onerous, usually coming on top of pre-money valuations that struck me as very low. There is definitely a place for these type of investors, however I suspect that companies need to be much further along than we were to give them a strong negotiating position.
All in all raising funding was a roller coaster journey and I am richer (only in knowledge) for the experience. Keep in mind that fundraising always takes a lot longer than you expect and be prepared for lots of conversations that might not necessarily lead anywhere. The saying you have to kiss a lot of frogs to find your prince is never more true than when raising money.