One of the most difficult parts of starting a startup for any entrepreneur is finding that small bit of seed capital to get things going. As evidenced by small seed funds like Y Combinator, a little can go a long way for startup entrepreneurs, but raising that chunk of change to get started can be tricky. Luckily, there are a number of different roads you can take to get from concept to Series A. Below is a list of 13 seed funding options for startup entrepreneurs.
This list is a mix of old, borrowed, new, and blue:
- Bootstrap from revenues. You will exit for an EBITDA multiple. Forget about crazy high multiples unless you have that magic formula that really can create high growth + low costs on almost zero capital -- but if you really have that you won't need/want to exit. Don't worry about what anybody thinks other than users and customers. No, this does not have to mean enterprise products; consumer ad-supported works fine as well -- just ask the founder of Plenty Of Fish.
- Self-fund on credit cards and a second mortgage. You are brave, maybe brilliant, and maybe stupid. Just don't expect any VC to give you more than words to recognize your courage. And also remember: it will take more capital than you think. Self-funding is not bootstrapping, it is just using your money and not somebody else's money.
- Do consulting on the side to self-fund. This is less risky than using credit cards. One partner works for a Big Old Dinosaur on contract for $20k per month and splits it 50/50 with the other partner, who builds the company which is shared 50/50 between the two. It gets a little more complex with more than two people.
- Rase funds from friends and family. This can augment any of the above options. Richard Branson (a man who knows a thing or two about starting companies) can help with formalizing the relationship to avoid emotional damage.
- Already a successful entrepreneur? Self-fund from cash via your last exit. VCs will be beating down your door to co-invest. Your choice...
- Go from concept directly to $3m Series A. Wait, you did say your name was Marc Andreessen, right? No? Oh, sorry.
- Use angels as a bridge to Series A. This is the perceived traditional route. If the angels know the VCs that is fine, but if not, then the VCs may cram down the angels, and that's tough on you and those early investors that you've built a great relationship with. This works best if VCs tell you early, "We like the space/concept/you, develop it a bit and we'll be interested. MyFavoriteAngel can help you get there."
- Use angels to augment bootstrapping. You have a to show a really clear path to profitability that is not dependent on VC funding.
- Use angels as a bridge to a flip. Angels who know the target acquirers can make this a sweet deal for all.
- Spray and pray models. A fund or incubator that puts tiny sums into lots and lots of ventures in hope of finding one star in the bag (see this post). Sounds a tad random to me.
- Seek out founder-only evergreen seed funds. These are slightly more formalized versions of angel networks that aren't managing other people's money (i.e. LP=GP). Exits get re-invested into the fund, so there is no fixed time horizon for exit. There should be more of these.
- Get a convertible loan from a VC to develop your concept to a level where Series A is appropriate. Charles River Ventures led the way with their CRV Quick Start program. More of these would be great.
- Check out one of the paid links when you search for "seed funding" on Google. Not.
The good news: I planned my usual 11-point list and had to go to 13 (well 12, if you leave out that last one -- which you shouldn't). The bad news: none of these options are easy. But then, you already knew that, right?
Comments
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I have funded business start ups with both credit cards and a line of credit. The risk can be decreased by only acquiring the bare minimum during a business start-up. Another thing that worked for me was to allot a % of gross towards R&D. This money is pooled to buy new equipment.
Posted by: Make Money Online by Homebizseo | April 16, 2008 12:45 AMI fund my ideas with my business. My plan is to keep on releasing my projects until I get a winner.
Also if you self fund and don't have huge overheads then you can go quite far.
My first 2 projects were http://justaddme.com and http://crowdstatus.com There is noway anyone would have funded me for these but all they have cost me is time and hosting. Both sites have done pretty well in the very short lives so far. I pretty much spend 50% working on my ideas and 50% dealing with clients and it works well.
I guess the self fund route is much easier if you are a developer because of the cost to market is a lot cheaper.
Also with this route you don't overly have to worry about making money from these apps from day one. Also as you have noone to answer to if they make you more money than the time you put in then its a win.
Posted by: Darren | April 16, 2008 1:57 AMGood strategies. Good luck too.
Posted by: 113.com | April 16, 2008 3:37 AMsomehow I doubt anyone would want to fund my cheesy site softOrnot.com
Posted by: miguel | April 16, 2008 5:20 AMFrom http://www.loveatmadisonandwall.com/2008/04/13/an-8-axiom-2-inference-proof-that-many-entrepreneurs-who-succeed-in-the-coming-years-will-provide-sperm-to-ladies-who-supply-cough-seed-capital/
"Axiom" 1: The number of affluent women who pay for sperm has grown rapidly in recent years [1].
"Axiom" 2: In 2002, the average price of top-quality sperm was $2,950 [2].
"Axiom" 3: Paying a lot more for sperm is not unheard of. From the classifieds section of the Palo Alto Daily News (2001):
“Stanford student wanted for sperm donor. $15k offered. Intelligent, good looking, over 6ft. tall. No history of self or family addictions.”
"Axiom" 4: Women are likely to assign a high value to the sperm of a promising entrepreneur [3].
...
Visit the URL to view the whole "proof".
Ah, modern life :-)
Best,
Posted by: Frank Ruscica | April 16, 2008 6:24 AMthaks for the info
bloggersmosaic.com
Posted by: bloggers mosaic | April 16, 2008 6:57 AMThere is also Seedcamp here in Europe. The main aims are to build an ecosystem that will help more start-ups to get off the ground and also as an access to that very early seed funding. With a stroger ecosystem here in Europe, maybe in your next post we can have options 14, 15, and 16!
Posted by: Reshma | April 16, 2008 7:07 AMWhat is the best way to find Angel Investors? Few items show that angels might play an important role, but maybe next post you can add info to websites/resources where we can find info on finding someone who might be interested in helping to fund various venture. Thank you for the ideas..
Posted by: Gene | April 16, 2008 7:40 AMDoes anyone makes enough money from blogging?
Posted by: Eugeny | April 16, 2008 7:51 AMIs online ads a good way to support online job full time?
Thanks for the lovely tips...
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Bottom line:
Only tiny sums are readily available. If your idea does actually require a couple million to get to product and customers, you're out of luck.
This is a problem for both VC's and entrepreneurs. For VC's, it means less deal flow and lots of me-too easy-to-ripoff ideas.
More on my blog:
http://smoothspan.wordpress.com/2008/04/15/how-to-fix-venture-capital-part-2-the-opening-is-as-important-as-the-endgame/
Posted by: Bob Warfield | April 16, 2008 9:16 AM# 8. Realistically, you really need to know somebody who is an angel who will introduce you to one. If you really have to go in cold, you could try:
Posted by: bernard lunn | April 16, 2008 12:58 PMhttp://www.angelsoft.net/
On Point! Self financing through credit cards, just shows how stupid people can be. Living of other peoples money... hmm? Addicted to "OPM"?
Posted by: Jose Paul Martin | April 16, 2008 1:31 PMOne option not mentioned is free cash from sweat equity which, if properly accumulated with joint ventures like United USA, can grow into a tidy fund of seed money, while providing a steady flow of hundreds and thousands a week. If free shareholder No. One can do it, then Two, Three and Four following after can do it as well, and the cycle need never stop. United USA provides greed caps at the upper end, to recycle seed money back to entry level, to avoid greed kill at the top, and to keep the sweat equity at the entry level active and enthusiastic through success realization in the early stages, to keep the cycles going. Check out http://www.viralurl.com/Ex-Post-Facto-Fund/payout/ and http://www.viralurl.com/Ex-Post-Facto-Fund/EarnMoneyNow/ which can generate a growing pool of money, than can be expected to reliably expand, all without any initial investment. This income shot-in-the-arm can get any traditional enterprise up and running in no time.
Posted by: George Clarke | April 16, 2008 3:06 PMDon't forget that human element. Software and companies are about people.
We bootstrapped our first company. A group of us invested 8k and got an 8 figure exit, so it can be done. For our second project, www.culturemob.com, we're looking to do something bigger so we brought in a great group of Angels. In addition to dollars, they've brought great insight and expertise that we could never afford to hire in-house as full-time employees.
Not all investors bring that to the table. Some may slow your progress, others accelerate it. Something to keep in mind.
Best of luck!
Posted by: Steve McCracken | April 18, 2008 1:13 PMTo find an angel investor, first find a local angel association. Angels have been getting much better organized in the past few years.
If you are in the United States, start with the directory at the Angel Capital Association: http://www.angelcapitalassociation.org/dir_directory/directory.aspx
Then from there, find some local angel groups. From there you can start attending public events put on by local angel groups, getting people you know to introduce you to individual investors, or communicate directly with individual angels. Start developing relationships with local angels and being seen at their events.
I'll bet there are other angel directories/groups in other countries, too.
Posted by: Anita Campbell | April 19, 2008 10:06 AMA CEO friend forwarded this page to me and suggested that I comment so here goes: My bias here is that I invest directly in young, growing companies by offering to provide equipment leasing WITHOUT requiring personal guarantees or requiring warrants or other equity participation rights. The catch is that we require the companies to have equipment needs of at least $100,000 over the next 12 months and we do have minimum requirements for EITHER revenues or paid in capital. So, you can finance your company without personal guarantees and without giving up a big chunk of equity IF your business has some on going fixed asset requirement.
Posted by: Tom Carter | April 28, 2008 11:13 AM