Dipanjan Nag, President and CEO, Prediqtus
Seven ways to fund your startup
So, you want to launch your own startup and build your own bright future? The Lean Startup by Eric Ries, changed the way many people think about dealing with startups. I left the university technology transfer world three years ago to build my own venture. In the university world faculty members sometimes do this, but almost never to leave the university. In the technology transfer world, it would be perceived as a “reverse commute.” Some people join technology transfer after having a successful entrepreneurial career, very few become an entrepreneur, leaving university technology transfer. In spite of all of the odds I wanted to do it!
It was important for me to understand what I was getting into, before I took that leap of faith. So, I did my own due diligence. Today’s environment for early stage investing in startups is extremely challenging. Startups are like three-legged stools, held by technology, funding, and management. Which is the leg, that is most important for success? That answer depends strongly on who is being asked. In my opinion, management is by far the most critical factor. Based on this belief, I left my job to enter the uncertain world of entrepreneurship. I will focus this article on the funding piece of the startup puzzle, which is sometimes almost as difficult to find. Tying up with the right kind of funding is a key for the success of a startup.
Most people think funding is for sustenance, product development, and marketing for the startup. Ultimately, those are all of the corollaries; the one key factor is de-risking of the startup venture. Every stage of funding that a startup receives, takes it to the next state of de-risking, making the venture ultimately more appealing to the next round of investors.
Here are the key sources of funding in the ever changing environment of startups.
Angel funding – This is perhaps the most critical funding available for an early stage startup in today’s environment. We were fortunate to find angel funding for our startups. Beyond just securing angel funding, it is important to ensure that funding comes from the right angel. People who are in the field or understand your business model are the best kind of angels. Think of your angels as Board members; they will likely have very strong opinions about the future of the business. Each angel will expect their opinions to be regarded with care and attention. For this reason, attracting few angels with large investments is better strategy than attracting many angels with smaller investments.
Angel deals may be smaller in size, but the number of deals is substantially larger than that of venture capital deals.
Venture Capital – For the most part VCs do not fund very early stage companies, unless of course you are in the field of software and you are developing Angry Birds or Candy Crush! Most startup companies do not need more than $500K to start in the engineering space. If you are in the field of pharmaceuticals, biotech or another capital-intensive space, your best bet is to seek VC money. It is extremely difficult to secure VC funding without the right kind of introductions and financials or expected financials. In most cases VCs are looking for sales where you are looking to just prove the model. If you are looking for large amounts of capital, ultimately it will be necessary to turn to institutional investors. This can be a classical VC such as Kleiner Perkins, Khosla Ventures, Google Ventures or a strategic investor which has domain expertise in a certain technology sector.
Grants – In the United States we have a wonderful mechanism called SBIR (Small Business Innovation Research), in which the government sets aside ~2-3% of all federal funding for small businesses. It is not widely understood that this funding is only intended for small business; universities and large businesses cannot apply for it. Interestingly, you can have a university as a partner in a SBIR or STTR(Small Business Technology Transfer). Universities can only get a maximum of 1/3 of the grant in a SBIR and 60% of the funding in a STTR. Why would you partner with a university? They are the best there is for research collaboration. University partnership can be a boon for R&D; however, it is critical that you know how to negotiate with a university on intellectual property terms. This will be the subject of a future article
University Proof of Concept Funds – Depending on where you are located, many universities like Washington State University, Michigan State University, Partners Healthcare Innovation Fund have various kinds of early stage funds for fostering startups. These are excellent ways to get a startup going without too much dilution. Obviously, to access these funds you have to work with a university technology and the University will have substantial influence over your startup venture. Still, the advantages of working in collaboration with research faculty will greatly outweigh the control that the university will have with your startup.
State Funding – Many states like Florida, Maryland and many others have state programs where they match the funding that is brought in by the startups. Sometimes you can leverage this matching fund with investors. The State just wants to see the company stay where the technology was born. In this regard, the State of New York is way ahead of others in supporting their startups. A State like New Jersey offers little or no incentive for startups to remain in-state, from a tax incentive or fund matching standpoint. In many cases, there are programs within a state which can help secure non-dilutive funding for specific goals. For example, there is an autism funding program in the State of New Jersey which helps support research. With your specific goal in mind, it is always a good idea to research the opportunities at the state-level.
Non-profit funding – Everyone knows about the Bill and Melinda Gates Foundation, the most savvy and active non-profit funding agency on the planet if your business goals align with their mission. Other foundations like the Juvenile Diabetes Research Foundation, Michael J. Fox Foundation, or the Autism Speaksare major funders for disease related areas.
Crowd Funding – Saved the best for last. There is significant buzz around the new equity crowd funding model. Most people who are in the field of technology startups are exploring crowd funding models due to the JOBS Act of 2013 (also look atWikipedia JOBS Act). This is an exceptionally good way to get funding for consumer product related startups. Platforms like Indiegogo are exceptional not only for raising funding, but also for getting a lot of attention from other investors. Buzz and funding opportunities aside, you must be very careful with crowd funding if your development process includes regulatory hurdles. If you cannot deliver the product on time to your wonderful crowd investors, all of the money raised must be returned. That is a scary feeling for most startups.
- “A total of 534 out of 3,361 companies successfully hit their equity crowdfunding target in year one, thank you Title II of the JOBS Act. According to Crowdnetic, $217.7 million equity capital was raised, which averages $407, 685 per company.” – Forbes, Kay Koplovitz, Septemer 2014. Read the full article.
- Crowdfunding has helped more than a million startups raise over $3.2 Billion, and is revolutionizing the way small businesses find the capital they need to grow. By putting the tools for fundraising success in the hands of entrepreneurs like never before, crowdfunding is on track to surpass $5.1 billion in 2013 and continue to transform the landscape of business finance. – Fundable.com
- Great resource for learning more about Crowdfunding –http://www.fundable.com/learn/resources/guides/crowdfunding-guide
A few equity crowdfunding sites:
Statistics for the two most popular crowdfunding models.
Ultimately, the three aspects of a startup: management, funding and technology, are all important, but funding and management are really key factors for success. The landscape of raising capital is changing rapidly. The seven ways to raise funding for a startup are all viable options, but deciding which ones to focus on is probably going to be the what determines if the startup will make it or not. Remember, only one in ten startups will ultimately make it, will your startup become the next Instagram, Dropbox or Tyrx?