In this article, we'll look at what it takes to raise funds to pre-launch a startup. Where to get money for hiring staff, IT product development and sponsoring marketing campaigns.
Of course, each case is individual, but here we will highlight the most famous methods of raising money and analyze the reasons for the success of well-known startups.
1. I will do everything myself!
It is quite realistic (and perhaps desirable) to finance the company with your own money. If you have a new idea, you don't need millions to bring it to life. A good business model can be profitable even with a small initial capital.
The implementation of MVP does not require large investments. The site can be made for free, on the knee (no-code tools, or with the same WordPress). Bring the first users - from your own social networks. And only if the idea seems promising - look for investors. For the first six months, Zuckerberg developed Facebook only with his own money, and this did not prevent him from creating a company worth a trillion dollars.
2. Borrow wisely
How to get money for a startup
Most of us do not want to risk even small amounts. And, when it comes to starting a business, many people think of a loan first. If people invest in me, then the project has a future!
The main disadvantage of obtaining a loan for a young business project is its uncertainty. It is not yet possible to guarantee future profit (or estimate its scale) here. Banks are reluctant to lend money to start-up entrepreneurs. They view seed funding as a risky deal with a high probability of non-return on investment. Hence the strict requirements for the borrower, the complexity and duration of the procedure for obtaining a loan.
How to increase your chances of getting a loan?
Small and medium-sized businesses that have worked for at least 6 months have more chances for approval. With a loan for a new project, it will be much more difficult: there is practically no turnover, customers, suppliers. There is only the desire of the founder to develop.
There are countries that have special programs to help small businesses and start-ups. For example, the US Small Business Administration (SBA). This is a government agency that provides support to entrepreneurs. It cannot lend money directly, but it can give a guarantee to a specific borrower. This borrower will be much more likely to get a loan from a bank.
There are also several such programs in Russia. For example, the National Guarantee System (NGS). You can immediately apply for a loan to one of the NGS partner banks, and they themselves, on your behalf, will apply for a guarantee. Also, Skolkovo is still working for us. The purpose of the fund is to support technological entrepreneurship in Russia, and they are definitely worth contacting (you will not lose money). Sber also has an interesting project.
You can find a list of existing programs and competitions for grants on special portals for small and medium-sized businesses.
3. Angel investments
Business angels are professional or ambitious private investors. They invest personal money - usually at the pre-launch stage of the project's IT development. They can be found on special sites. For a Russian-speaking startup, we can recommend:
Moscow Investor Club
Union of business angel organizations
To impress the angels, you'll need great presentation skills and a lot of luck.
How can a startup get money from angels?
A business angel wants to understand how the company plans to promote itself, how much it will cost to attract each client. Therefore, you need to be 100% ready to answer the following questions:
What profit will each client bring?
How are you planning to advertise? Where when? What is your PR strategy
What will be the typical sales cycle from the first contact with the buyer to the conclusion of the transaction?
What is your social media strategy?
How much will it cost to acquire a client?
If you have a business model, an MVP, and a decent idea, getting paid won't be that hard. There is a lot of easy money in the world now, and there are also enough angels, including in Russia. But, of course, if you believe in the potential of your startup, it will be unpleasant to give part of it into the wrong hands. Luckily, there are alternatives...
4. Launch Grants
How to get a startup grant
What is the difference between investments, loans and grants?
When attracting investment financing, the owner of the company sells his part (capital) and receives funds for its further development. In turn, investors (business angels) often take startups under their wings and help get the next rounds of investment.
When obtaining a loan from a bank, the latter will require collateral. Even if startups manage to find an amount or an object on bail, the risks are still very high. In case of failure, you will have to deal with refinancing for a long time, or even lose the specified collateral.
Start-up grants are funds that are given free of charge to start-ups to cover
i basic expenses. They allow you to pay for the search and training of the team, the purchase of equipment or office rent. The main advantage of such financing is that the recipient does not transfer part of his company to the fund. As a rule, you only need to report on the intended use of the funds received.
Grantors are usually government business support funds that receive nothing in return. And being a recipient of a grant is doubly beneficial, because grant givers trust each other's choices. That is, after receiving the first grant, the probability of receiving the second does not decrease, but increases.
A few funds to which it is really possible to break through:
Innovation Promotion Fund. Gives grants up to 3 million rubles. Applications have just begun (December 27), will last until February 27, 2022.
The Ministry of Digital Development of Russia issues grants up to 20,000,000 rubles. You can read the conditions on their website, get support more than real.
RFRIT. Russian Foundation for the Development of Information Technologies. Undertakes to cover up to 80% of startup expenses. They provide two grants, both in the amount of 20 to 300 million rubles. They say it's very difficult to win here.
Amber Grant, founded in 1998, awards monthly grants to women-owned companies. In general, a pretty good startup accelerator.
Agency for Strategic Initiatives. They constantly choose projects that they help - though, unfortunately, not with a ruble. But it’s still worth a try: you don’t lose anything, but you can get PR and simplify work with government agencies.
Sber500 accelerator. Intensive training program for startups from Sberbank. You need to have a legal entity, MVP and speak English. You go through online intensives, in a few weeks the top 25 can present their projects to representatives of 500+ corporations and foundations.
5. Venture Capital
Venture investments are investments in a growing business or start-up. These are no longer private angel investors, but funds that are not inclined to take too much risk, and which will need to be convinced with clear numbers. Also, investors will require a share of a startup / project. But it's worth it. Thanks to venture capital investments and the advice of venture capitalists, such companies as Amazon, Apple, Facebook, Gilead Sciences, Google, Intel and Microsoft have developed in their time.
It is important to understand how venture capitalists learn about the companies they invest in. About a third of their investments go through professional networks: a venture capitalist communicates with other venture capitalists, lawyers, financiers, professors at top universities. And they recommend them new talents and promising startups. That is, it is not necessary to immediately contact a venture capitalist, it is better to first enlist the recommendation of one of his contacts (see LinkedIn).
Remember that an investor is just as interested in finding a promising startup as a startup is in attracting investments. Therefore, if you are confident in your product, do not hesitate to get acquainted and tell investors about it.
Among Russian funds and those who are loyal to Russian startups, we can note:
Day One Ventures
AltaIR Seed Fund
Internet Initiatives Development Foundation (IIDF)
RTP Global (ex Ru-Net)
Examples of financing successful startups:
How to finance a startup
1. Oculus, virtual reality helmets
Many great software companies started in a garage. Oculus is following in the footsteps of Apple, Google, Amazon and HP. After a long day at Cal State University's Mixed Reality (MXR) Lab, Oculus founder Palmer Lucky would head to his garage to work on his own helmet.
Palmer has been building virtual reality helmets by hand for several years. His salary was small, so he saved as much as he could. I bought gadgets that I wanted to throw away, participated in eBay auctions, and even personally went to sellers so as not to pay for shipping. By his own estimate, Palmer had the world's largest private collection of half-finished VR headsets.
After he prototyped the Oculus Rift, he launched a Kickstarter company. Which raised $2.5 million with a $250,000 goal. The campaign served as an excellent MVP and confirmed that there is a market for such helmets. Lucky quit his job, dropped out of school, and started building the Oculus production chain. Six months later, venture capital firm Andreessen Horowitz invested $75 million in the company. A year later, Palmer sold his IT product to Facebook (now Meta) for $2.3 billion. Nobody expected such a successful and quick sale.
2. Youth to the People, skin care products
Youth to the People ranked among LinkedIn's Top Startups of 2021. The founders of this brand, Joe Klois and Greg Gonzalez, had a small store in Los Angeles, which worked for only a few months. Then, after assessing the situation, they quickly switched to online sales only.
They crowdfunded and raised $2 million on Kickstarter. The skin care industry has grown very fast.
in its volumes during the pandemic (such a paradox), and now this startup earns under $8 million a year.
3. GitHub, a Git repository hosting web service
GitHub was founded by Tom Preston-Werner and Chris Wanstrath. This startup started out just as a joint project "for fun" - to code together on something with friends. In 2008, while working for Microsoft, Preston-Werner turned down the company's $300,000 bonus and options offer and quit to work on GitHub full-time.
All 3 founders funded the startup themselves, covering the cost of the domain and hosting. Today, GitHub has 3.4 million users with 16.7 million repositories, making it the largest code hosting service in the world.
In January 2009, GitHub won the Crunchie (an award given by TechCrunch) as the best startup. In 2018, Microsoft bought GitHub from the founders for $7.5 billion.
4. eBay, online auction
eBay was originally called AuctionWeb. It was founded by Iranian-American programmer Pierre Omidyar in his living room in September 1995.
The project was conceived as a platform for the sale of goods and services for individuals. One of the very first items sold there was a broken $14.83 laser printer. eBay was just a side hobby for Omidyar until his ISP asked him to upgrade to a more expensive plan due to the high volume of incoming traffic.
In 1997, the company received $6.7 million in funding from venture capital firm Benchmark Capital. eBay went public the following year. The company is now valued at $41 billion.
How to increase the chance of receiving a grant / angel money / investments from VC:
Come up with an idea for the design of your document, create a clear template. Then it can be supplemented or changed in accordance with the requirements of a particular investment fund or business angel.
Find a grant, fund, or competition to help small businesses. Read the requirements and conditions, study in which case you will receive funds, and why you may be denied.
Read carefully what documents you will need to submit. It is usually necessary to provide a description of the project and a business plan.
Submit an application for a grant or participation in a project. How to apply is written on the website, usually it is done online.
You may be asked to fill in additional information about yourself or the project. The application will be reviewed and a response will be sent by e-mail. Then they can invite you to a public discussion, where you will need to personally defend your project.