The famed Apple marketing whiz Guy Kawasaki once said about starting a business, “the hardest thing about getting started is getting started.” And while we entrepreneurs are naturally motivated people, he was certainly right in one respect. From a funding perspective, it can be damn hard to start a business.
Sure, the eruption of digital and online business has brought down these barriers somewhat, so much so that it’s now possible to start a business with $127. But still, many businesses require more than this. You might need to develop a product, for example, or create software, and that’s not to mention marketing costs.
Starting a business isn’t always cheap. But the good news? There are tons of funding options to help you get started.
To help you understand how to fund your startup online business, we interviewed five entrepreneurs who have been there and done just that.
Understanding such personal experiences is critical, because funding to start a business isn’t simply about the money. It’s about networking. It’s about relationships. It’s about your personal brand. And above all, it’s about trust. Convincing someone, no matter who they are (even if it’s yourself) that they should hand over money to help you start a business has everything to do with people, and less to do with your business idea than you’d think.
Funding Option #1: Pre-Revenue Venture Capital
Considered the holy grail of funding options, many entrepreneurs dream of having investors swoon over their ideas and throw cash their way. If you’d like venture capitalists (VCs) to fund your business, there’s never been a better time: startup investments are expected to keep soaring and investors are buoyed by increasingly high rates of return.
Yet at the same time, venture capital is viewed by some as difficult to obtain, due to the fact that VCs often only fund businesses within their networks, meaning that if you don’t get an introduction, getting funding can be a challenge.
To understand exactly how to fund your startup online business with venture capital funding, we spoke to the co-founder of AI-powered skills-testing platform Vervoe, Omer Molad, who raised pre-revenue venture capital.
Here’s how he did it.
Throughout 2016, Omer and his co-founder David were doing the typical entrepreneur double-shift: working a 9-to-5 job, while building a budding tech business at night. Omer was trying to build what we he thought would be an MVP for his talent platform, but he kept falling short.
‘We invested thousands into creating an MVP, but the experience wasn’t what we wanted it to be.”
Despite that, David had secured a number of clients for their platform. Many were using the platform for free, but some weren’t.
“We had a few clients, and some were paying. But they weren’t paying much, maybe $100. Still, we took that as the first signal that we had something worth investing in. If someone was willing to pay for it, it meant there was demand.”
Paying customers were Omer and David’s first signal, but the second and admittedly more important signal they got was from investors themselves. In late 2016, he kicked off an aggressive networking round to secure more funding to build out his platform
“I went and had something like 40 coffees with investors. I started in my network, and everyone conversation I’d have, I’d say ‘Who else should I talk to?’ With every conversation, I got more confidence that I could raise money.”
As Omer was meeting people he knew, or knew of him, they had high confidence in his ability and his commitment. Critically, though, investors saw that Omer and David were solving the issue he’d identified in a particular way:
“What they saw was a scalable business model. They had confidence in us, they understood the problem we were solving, but most importantly, they saw that we were solving the problem with tech.”
Following Omer’s networking round, he put together a company valuation and an investment invitation document, which he then sent out. If potential investors showed an interest, Omer then forwarded them a deck, and he’d meet them to get them to sign a commitment letter. At the end of the round, Omer and his team had raised $1.25 million.
So what should you do if you want to emulate Omer’s success? Follow these steps to fund your startup online business using venture capital:
- Create a sound MVP: Your MVP won’t be perfect. It is, after all, a minimum viable product. But it should be enough to showcase your vision and help investors understand what might be possible.
- Secure a paying customer: If you’ve convinced a client or customer to pay for your product, that proves that there’s demand. Having a case study (or ideally, a few) engenders confidence in future investors.
- Get advice from founders one step ahead of you: Investors may have an agenda, but founders have been there and done that, and don’t want anything other than to help. Before seeking investment, reach out to others who’ve secured it as they’ll be able to provide invaluable advice.
- Network and ask for introductions: For pre-revenue investments, investors are investing in you, the founders, just as much as they are your idea. So if possible, try to seek investment from people you know, or alternatively, proactively ask for introductions.
- Create a sound valuation of your business: VCs naturally want to know what return they’ll get on their business. Make sure you create a realistic valuation before inviting VCs to consider investing. You can value your startup using these methods.
Funding Option #2: Crowdfunding
If venture capital is every entrepreneur’s dream, a great crowdfunding campaign is a close second. Imagine the thrill of “selling” your product to hundreds or even tens of thousands of people, all before you have to hit the submit button on an order! This is the kind of security that crowdfunding platforms such as Kickstarter, IndiegogoorCircle Up provide.
Ever since its arrival in 2000, crowdfunding has become an increasingly popular source of funding for entrepreneurs, with an incredible $34 billion raised to date. And more than a few entrepreneurs have hit the jackpot with crowdfunding. The “Exploding Kittens” party game raised $8.8 million and Pebble watches raised multiple rounds in the millions. There are many other examples like these, proving that there really is no limit to what you can do with the power of the crowd.
But how exactly do you do it? We spoke to Nik Robinson, who recently ran a successful crowdfunding campaign for his recyclable sunglasses business, Good Citizens.
Like many parents, Nik and his wife Jocelyne, who is a co-founder in the business, would hear about the importance of sustainability from their sons, aged 6 and 8. To help teach them about entrepreneurship and, more importantly, to be good citizens of the planet, Nik and Jocelyne decided to create a business that turned one plastic bottle into a pair of sunglasses.
Approximately nine months after their initial idea and after having invested approximately $75,000, the family had a prototype. But they also had a problem. They wanted to purchase a machine to manufacture the sunglasses locally, and this was going to be expensive. So they decided to try raising funds via Kickstarter.
Setting up his campaign on Kickstarter was no simple task, Nik says.
What you’ve got to understand about is that when you start a campaign, it’s not simply a campaign to make money. The day you start your campaign, that’s the day you’re in business. You’re making a promise to these people and you need to deliver. You need to have a solid, actionable plan on when and how you’ll do that.
Knowing how and what you’ll deliver isn’t the only consideration though, Nik says:
What you are essentially running is a marketing campaign. And you’re asking for people’s money, people’s trust, so it needs to be exceptional. You need a professional video. You need professional photos, professional copy, everything, you need it all to be successful.
Nik warns, though, that marketing on your campaign site isn’t the only thing you’ll need to deliver on. Like any other marketing campaign, you need to drive traffic to your page, whether it be through paid advertising, PR, or other methods.
“Jocelyne is a PR professional, so we invested heavily in PR, and we were able to secure features in tier 1 media outlets, including on TV. This really helped with our traffic.”
In the end, 360 people backed Good Citizen’s project, and Nik and Jocelyne were able to raise $61,400.
So what should you do if you want to emulate Nik’s success? Follow these steps:
- Create a working prototype: When you pitch your product via crowdfunding, you’re making a promise that you need to deliver on. Make sure you have a prototype ready to go.
- Plan for execution: On most crowdfunding platforms, you need to deliver your product by a certain date, otherwise everyone is entitled to a refund. To ensure you can do this, make sure you have a sound operational plan to manufacture your product.
- Go professional (or at least look professional): Your crowdfunding page is no different from an ecommerce store—it needs to look professional. Make sure you invest in creating a top-notch brand, photos, videos, and copy.
- Make a plan for traffic: Crowdfunding platforms are just that, platforms. If you’re launching your product, you need to make a solid plan to drive traffic to your campaign. This may include PR, paid advertising, influencers, or any other means.
Funding Option #3: Family Loan
As the saying goes, you can choose your friends but you can’t choose your family. But when it comes to figuring out how to get funding for a startup, sometimes it’s best to choose your family, for a number of reasons.
Before venture capitalists and crowdfunding appeared on the scene, if you wanted to start a business you had two options—self-fund or borrow from your family. And while there’s no official statistics on how many people get family loans to start their businesses, we do know that there are a lot of family-owned businesses out there: 5.5 million, in fact. For as long as businesses have been around, it’s been common to borrow money from your loved ones.
But how do you do it? To understand how to fund your online business using a family loan, we spoke to Nick Hotchin, co-founder and marketing director of Responsive Lending, an online lending platform. Nick borrowed money from his dad to start his business.
He was in a successful career in finance when Nick had the idea for Responsive Lending. But after a bit of research, he made an unfortunate discovery.
“I realized that what I wanted to build already existed! But in good news, it was going to be possible to be a franchisee. So I decided to meet the founder of that business, see if we clicked.”
Nick did get along with the Responsive Lending co-founder, so he decided that he wanted to buy into the business and expand it. But he ran into a problem, in that he didn’t have the requisite funds. At this point, he had two options:
“My funding options were redrawing into my mortgage, or asking my old man. From the start, I actually wanted to ask my dad. Having someone from my family fund it and then expect something from me, I wanted that, that extra pressure was motivating.”
Nick didn’t simply want to ask his dad for the money, though. He wanted to treat his dad like any other investor, so he put together a proposal and a solid projection for business financials.
“My dad was an accountant, so above all else, I knew I had to get the numbers right. I presented him with a detailed plan, including how long the business would take to be profitable, and when I would pay dad back.”
After the meeting, Nick’s dad did ask for additional financial information. But in the end, Nick secured the loan and agreed to pay his dad the market interest rate (what he was paying on his mortgage at the time).
After taking the loan, Nick wasn’t sure how his relationship with his dad would change. But he said that in the end, it changed for the better.
“It made us closer. It gave me that bit of pressure, but it also gave us more to talk about,” he says.
Nick hasn’t paid back his loan to his dad just yet, but he does pay him interest regularly.
Want to borrow money from your family to start your business? Follow these steps to fund your online business using a family loan:
- Treat your family member like you would any other investor: To pitch your business idea to an investor, you’d need a solid MVP, financials, and a business plan. Pitching to your family is no different. Sure, they know and trust you but they also need the assurance that their investment is sound.
- Make your terms clear: Will you be paying your family back or are you giving them equity? Make your terms clear with an official contract. It might seem like overkill, but relationships can often go sour over money.
- Separate work and life: Your family member will want to hear about your business, but this probably isn’t all your family want to hear about. Schedule specific times to give them a business update.
Funding Option #4: Secure a Corporate Partner
Big businesses aren’t what they used to be. The average lifespan of a corporation has plummeted from 24 years in the 1960s to just 12 now. Companies everywhere are looking at ways to transform and innovate, and partnering with your startup might just be the way they do so.
There’s actually a lot of corporate-partner sponsored startups, but you wouldn’t know it, as the partnership isn’t always obvious. One example of a hugely successful startup that began through a corporate sponsorship is Crowdz. Crowdz, which recently completed a Series A funding round for $5.5 million, was created in partnership with Barclays bank.
With corporate partnerships being so lucrative, how do you secure one? We spoke to Carrie Kwan, the founder of Mums & Co, to find out. Mums & Co, a business community for mothers, was created in partnership with IAG insurance.
Carrie was pregnant with her second child when she came across the idea for the company. Through a business connection, she was introduced to someone who would eventually become her corporate partner:
“I was introduced to Phuong Ly, the executive general manager of IAG, and it became evident that we had a mutual interest in reaching the small business community, particularly mothers.”
This mutual interest was extremely beneficial to Carrie, and after deciding it was something she wanted to pursue, she spent a frenetic few months developing an MCP with the backing of IAG. But during that time, she made it clear that it wasn’t just funding that she was after. She wanted a corporate partner who shared her values:
“I was halfway through my second pregnancy when I was in discussions with IAG. But when I raised this, they said, ‘Congratulations. You shouldn’t have to choose between your family and your career.’ This gave me assurance that they shared my values and understood my vision.”
Carrie signed on as a corporate partner for IAG, and the partnership remains strong today, over three years later.
Want to find a corporate partner to help fund your startup? Follow these steps:
- Build out an MVP: Just like any other investor, a corporate partner will need to understand your vision before partnering with you.
- Network, network, network: Meet everyone in your network, and pitch them our idea. Then ask them who they can refer you to. Repeat, repeat, repeat.
- Connect with other founders who’ve secured a corporate partner: They will be able to provide guidance and possibly introductions.
- Approach corporations directly: Many large companies that have innovation agendas will run incubators, demo days, pitch nights, or networking events. Research corporations that you think share your target audience and values, and see what they have to offer. You can also apply directly to corporate programs through websites such as CoVentured.
Funding Option #5: Self-fund
When you’re starting a business, sometimes the very best source of funding is staring right back at you in the mirror.
If you’ve decided that you want (or need) to go it alone when funding your business, know that this is absolutely an option. In fact, it could even be considered a great option, the likes of which has been taken by many famous entrepreneurs, including Gretta van Riel, who built multiple, multimillion dollar ecommerce businesses before age 30.
But what does going it alone really feel like? And how do you do it? We spoke to Olivia Carr, founder of SHHH Silk, a silk sleepwear brand, who has self-funded her business from the very beginning.
Olivia was travelling in New York when a maid accidentally misplaced her silk pillowcase. When she tried to replace it, she couldn’t, so the entrepreneur in her decided that she wanted to make this her business. As a full-time employee at the time, Olivia started to scrimp and save every penny.
“I saved everything I could, literally, everything. Saving in this way was a big deal for me, as I’d never been a homeowner, and that money could have easily been used as a house deposit.”
Olivia’s saving paid off. She saved nearly $50,000. Once she reached this milestone, she decided she needed to work in her startup full time, so she began doing just that.
After a few months though, Olivia realized that her $50,000 simply wouldn’t be enough to cover the cost of the stock she wanted to order. So she decided that she’d need to bring a business partner on board who could provide further funding.
“I was in the car with my daughter and I said, I’m going to ‘shark tank’ Tom . I think he’s right for this business, I want him onboard.”
Tom wasn’t a random choice for Olivia, though. She knew he was involved in numerous investments, but more importantly, that he’d also been part of failed investments before. Olivia didn’t think she’d fail, but it was clear to her that Tom wasn’t afraid to take a risk.
Olivia pitched her business idea to Tom, and he did invest to the tune of $100,000 (and has since invested significantly more in the business). Olivia says that Tom invested in her just as much as he invested in the business.
“Because he knew me, he knew what I was capable of. He saw that I was working on this full time. He saw that I’d put all my savings—literally a house deposit plus some—into the business, so that gave him assurance that I’d do anything to make this work.”
Tom and Olivia’s investment has paid off. SHHH Silk is now in its fourth year and going stronger than ever.
Want to self-fund your business (or fund it with a business partner?). Follow these steps to fund your startup online business yourself:
- Sacrifice and save: If you’re self-funding, you will need to sacrifice in order to save the funds you need. This looks different for every entrepreneur, but many sell assets such as cars or even homes to help free up cash to start their businesses.
- Find a co-founder you can trust: Regardless of how good you are at saving, sometimes you may simply need more funds. A problem shared is a problem halved, so to solve this, consider bringing on a co-founder. If you’re both investing significantly in the business, though, you’ll need to find someone you can trust. Try friends or business connections, but if you can’t find anyone suitable, consider using websites such as Cofounderslab or Angelist.
- Freelance on the side: Starting a business can be an all-consuming, full-time commitment. But if you’re self-funding and you’re concerned you’ll run out of funds, consider freelancing on the side so you can continue to earn an income.
Trust: The Foundation of All Funding
Make no mistake, you can start an online business on the cheap. But if your business is going to cost more than that, know that there are many good options out there to help you get off to a flying start.
As you’ve seen, though, having a great idea is just the beginning. When anyone’s funding your business (even if it’s just you handing over your hard-earned savings), there has to be a high level of trust. Investors, potential crowd-funders, corporations, and your family are all investing in you just as much as they’re investing in your business idea. So before pitching for any type of investment, make sure that you’ve got the trust of whomever you’re pitching and that you can show them you’re 100% committed to making your business succeed.
What’s your ideal type of funding? Why? Tell us what has worked for you and what hasn’t in the comments below.