Funding your tech startup

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Time to fund your tech venture?

Do you have an idea to be the next WhatsApp, Instagram or even Facebook? Maybe you have a bit more realistic ambitions and just want to gather enough money together to get your mobile or Web app prototype off the ground.

Where do you go if you don’t happen to be independently wealthy? What do you use for collateral to get your local banker to open up the purse strings when all you have is a clunky laptop?

First the good news. With the growth of open source software and the lean, minimally viable product approach to product development, it’s taking less money than ever to get an early version of your product off the ground.  But it still is going to take some resources unless you happen to be that unicorn of expert strategy person, developer and designer all tied into one.

You may skimp on resources and hire your friend’s nephew in high school in exchange for pizza and a few bucks but paying market rates to someone who knows what she is doing is probably a better strategy.

Boot strapping

An increasingly popular approach is boot strapping, using your own resources such as customer revenues from consulting, draining your savings account and maxing out your five credit cards to self-sustain your growth.  The mantra for this is so you don’t have to give up equity in your company, you can continue to own 100% of the shares.

Sounds good in theory and it’s not a bad idea to go as far as you can with this approach but expecting to make it to your final destination boot strapping may be wishful thinking.  A lot of optimistic tech entrepreneurs don’t know this term was derived from the 19th century saying “to pull oneself up by one’s bootstraps” which was used to reference an impossible task.

Yes, some businesses are profitable from day one with high margins and can sustain their own growth but that’s by far the rare exception. Most tech ventures take some serious cash to hit the big leagues.

Nkosi Khumalo, President of North Vancouver-based KSM Technologies and an experienced local entrepreneur and investor noted “I see so many bootstrapped ventures get 90% or 95% of the way there before collapsing to nothing. You want to leverage other people’s money to grow your venture, not rely on just your own resources.”

Debt Financing

Getting a loan for your tech idea can be difficult in the early stages when you have no tangible assets that can be used as collateral.  You may be able to still get a relatively small loan based on your own credit worthiness but in most cases you will have to secure it personally with something tangible.

The Canadian Youth Business Foundation has some great loan and mentorship programs for entrepreneurs between the ages of 18 to 39 with a solid business plan (www.cybf.ca/programs/).

Another helpful resource for getting prepared to ask for a business loan is VanCity’s Getting Inside a Lenders Head four-part video series for entrepreneurs (www.youtube.com/watch?v=P5Y3M3EBIbg). VanCity also has some great programs for social enterprises and micro-ventures.

Equity Financing

People throw around the phrase, “I’m looking for VC funding” like they are going to go to the corner store to buy a jug of milk. In reality, it is only a fit for an extremely small percentage of tech ventures.  Venture capital firms normally only invest once you already have a proven product that just needs more resources to scale.

A much better and more realistic source of funding for most early stage tech ventures is angel investors.  Angels are high net worth individuals that often have been entrepreneurs themselves in the past and who can write cheques in the $10K to $250K range and who sometimes invest in small groups.

Tech funding tips

1. Forecast how much money you will need and think about what you will use it for.  Have a clear idea of your business model and then build a financial forecast from that.  A good place to start is the Business Model Canvas (www.businessmodelgeneration.com/) and the BDC’s Business Plan template (https://www.bdc.ca/EN/advice_centre/tools/business_plan).

  1. Make sure you have “skin in the game”. You have to put in a substantial amount of your own resources into your venture before you can expect anyone else to!
  2. Start with a crowd funding campaign with a site like Indiegogo (www.indiegogo.com) or Kickstarter (www.kickstarter.com). Be prepared to get the word out and attract the first third of your funding from your existing network before you will get strangers jumping on board. See the top tech tips to launch a successful crowd funding campaign published recently in BIV (http://www.biv.com/article/20140121/BIV0304/301219959/-1/BIV/top-tech-tips-for-launching-a-successful-crowdfunding-campaign)
  3. Next, you can turn to “friends and family”. Make sure these early love money investors know what they are getting into and you better be prepared to do your absolute best to deliver!
  4. If you decide to go with debt financing, an effective way to go is with a service like Partners for Growth (http://www.partnersforgrowth.ca/) where they will spend time with you getting your financial plan in order and will pitch to multiple lenders on your behalf.
  5. If you want to attract some angle investors but don’t know where to find them, a great place to connect is the BC Angel Forum (http://www.angelforum.org/). They are looking for pre-screened ventures seeking equity financing of $100K to $1 million.

Harvard Business School professors William Sahlman and Howard Stevenson defined entrepreneurship as “the relentless pursuit of opportunity without regard to resources currently controlled”. Don’t let the limited financial resources you have now stop you from being the next tech star!

Written by Dr. Ivan Surjanovic and Cyri Jones, 
adapted from BizTech101 column in Business in Vancouver

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