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The Stages Of Traditional Fundraising. by saninng (m): 9:04pm on September 19
Sani Ibrahim
Abubakar Tafawa Balewa,University
Agricultural economics and extension
100Level, Nigeria.
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An excerpt from 'Get Funded!: The Startup Entrepreneur’s
Guide to Seriously Successful Fundraising'
Funding comes in stages.
Understanding these will help you know when and where to go
for funding at each stage of your business. Further, it will help
you communicate with funders more precisely. What you think
when you hear “seed funding” and “A rounds” might be
different from what investors think. You both need to be on the
same page as you move forward.
Early money stage
The first stage is early money , when cash is invested in
exchange for large amounts of equity. This cash, which ranges
between $1,000 and $500,000, typically, comes from the three
Fs: friends, family and (we don’t like this nomenclature) fools.
The last-named folks are essentially “giving” you cash, and
these investors are well-aware that you will most likely fail —
hence, “fools.”
Your earliest investors should reap the biggest rewards
because they are taking the most risk. The assumption is that,
ultimately, you’ll make good or improve their investment. The
reality, they understand, is that you probably won’t.
Your first money may come from bootstrapping or F&F, and
your first big checks may come from an accelerator that pays
you about $50,000 for a fairly large stake in your company.
Accelerators are essentially greenhouses — or incubators —
for startups. You apply to them. If accepted, you get
assistance and a small amount of funding.
Why do investors give early money? Because they trust you,
they understand your industry and they believe you can
succeed. Some are curious about what you are doing and
want to be close to the action. Others want to lock you up in
case you are successful. In fact, many accelerators have this
in mind when they connect with new startups. At its core, the
funding landscape is surprisingly narrow. When you begin
fundraising, you’ll hear a lot of terminology including
descriptions of various funding categories and investors. Let’s
talk about them one by one.
As the old saying goes, if you need a helping hand, you’ll find
it at the end of your arm. With that adage in mind, let’s begin
with bootstrapping.
Bootstrapping comes from the concept of “pulling yourself up
by your own bootstraps,” a comical image that computer
scientists adapted to describe how a computer starts from a
powered-down state. In the case of an entrepreneur,
bootstrapping is synonymous with sweat equity — your own
work and money that you put into your business without
outside help.
Bootstrapping is often the only way to begin a business as an
entrepreneur. By bootstrapping, you will find out very quickly
how invested you are, personally, in your idea.
Bootstrapping requires you to spend money or resources on
yourself. This means you either spend your own cash to build
an early version of your product, or you build the product
yourself, using your own skills and experience. In the case of
service businesses — IT shops, design houses and so on — it
requires you to quit your day job and invest, full time, in your
own business.
Bootstrapping should be a finite action. For example, you
should plan to bootstrap for a year or less and plan to spend a
certain amount of money bootstrapping. If you blow past your
time or money budget with little to show for your efforts, you
should probably scrap the idea.
Some ideas take very little cash to bootstrap. These
businesses require sweat equity — that is, your own work on a
project that leads to at least a minimum viable product (MVP).
Consider an entrepreneur who wants to build a new app-based
business in which users pay (or will pay) for access to a
service. Very basic Apple iOS and Google Android applications
cost about $25,000 to build, and they can take up to six
months to design and implement. You could also create a
simpler, web-based version of the application as a
bootstrapping effort, which often takes far less cash — about
$5,000 at $50 an hour.
You can also teach yourself to code and build your MVP
yourself. This is often how tech businesses begin, and it says
plenty about the need for founders to code or at least be
proficient in the technical aspects of their business.
You can’t bootstrap forever. One entrepreneur we encountered
was building a dating app. She had dedicated her life to this
dating app, spending all of her money, quitting her job to
continue to build it. She slept on couches and told everyone
she knew about the app, networking to within an inch of her
life. Years later it is a dead app in an app store containing
millions of dead apps. While this behavior might get results
one in a thousand times, few entrepreneurs can survive for a
year of app-induced penury, let alone multiple years.
Another entrepreneur we knew was focused on nanotubes. He
spent years rushing here and there, wasting cash on flights
and taking meetings with people who wanted to sell him
services. Many smart investors told him that he should go and
work internally at a nanotube business and then branch out
when he was ready. Instead, he attacked all angles for years,
eventually leading to exhaustion. He’s still at it, however,
which is a testament to his intensity.

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