So You Want to Fund Your Own Startup?
March 09, 2017
GE Reports Canada
With the right team, the right plan, and the right idea, self-funding can be the way to go. But there are a few things you should consider.
You’ve got a technology idea that you think has genuine business potential, and now you’re faced with trying to find enough money to take it to market. That could be a lot of work. Wouldn’t it be easier to just fund it yourself?
If that sounds like a good idea to you, you’re not alone. A recent Twitter survey by GE Canada found that self-funding was the preferred option for getting a startup off the ground, beating out the “Find an angel investor” approach by a thin margin.
A successful startup requires three main ingredients, says Joe Martini, director of Zone Startups Calgary, a business accelerator program based in GE’s Customer Innovation Centre: 1) a solution to a real-world, “bleeding from the neck” problem; 2) a scaleable business model that works for its target customers; and 3) a credible team. “It’s never just about the technology.”
“Self-funding, in the majority of cases, occurs out of necessity,” Martini says. “Arm’s-length or objective investors will not put capital into an early-stage business because it’s simply too risky.”
Self-funding doesn’t necessarily mean all the money comes from one person. Putting together a team of founders with the right mix of talent, each putting his or her own money on the line, is a key strategy, he says. “There is strength in startup founders coming from multiple disciplines.”
While a startup typically springs from the mind of an individual with either a technical or business background, that person should try to partner financially with co-founders whose areas of expertise complement one another.
“It’s important to build a team, including informal advisers, who are networked into your target industry as quickly as possible,” Martini says. “This allows self-funding to be spread across a team, and by building relationships early, advisors may be more willing to help in a variety of ways as the business matures.”
Another good strategy is to find an industry partner that is experiencing the problem to collaborate on a solution. Such a partner may contribute cash for development of a minimum viable product, in return for the ability to use the technology on a preferential basis. “This type of non-dilutive funding is ideal for a startup and helps mitigate the risk of self-funding the entire development,” says Martini.
The ability to step back and analyze your business idea objectively is also key to deciding whether to risk your own capital. That means constantly testing and validating your technology and business assumptions with customers from the target market. “Many early-stage technology companies are solutions looking for a problem, as opposed to nailing the industry’s problem first,” Martini says.
Taking a startup in a successful direction involves identifying not only the problem you’re trying to solve, but also who specifically owns the problem at a typical organization within your target market. Is it the CFO, the VP of operations, or someone else? Not only that, but are they willing to pay for the solution? How much? Answering these questions will help you understand your customers’ buying behavior and whether it is worth the hassle of changing the way they already do things. “Remember, doing nothing or maintaining the status quo is your biggest competitor,” says Martini.
Putting your money on the line to fund your startup can be an important symbolic gesture for customers and outside investors, should you seek them.
Those other funders could be what are called angel investors, the second most preferred choice of those who answered the GE survey. An angel is an individual or group that backs startups in exchange for equity in the business.
Beware of angel investors who are generalists, Martini says. If someone without deep experience and a network within your industry buys into your startup at an early stage, problems can result. “If they become actively involved in the business because they think they know better based upon their unrelated experience, it could be detrimental or even fatal to a startup company.”
In the end, wherever the funding comes from, it’s the interface between you and the marketplace that will make your company a go or a no-go, Martini says.
“At the end of the day, business is always about people, and if you can let go of any ego that thinks you know what the market needs, the market will be loud and clear.”