10 ways to fund your startup and what you might have missed at the Ontario Science Center last weekend
To raise or not to raise, that is the question.
Karafarin’s 2019 version of Orbit conference, and the 3rd ever, was held triumphantly this past weekend in Toronto. Kudos to Mahboob Bolandi and the entire organizing team for this success. It was an honor to be invited to contribute and I am very happy I did. I would give back to entrepreneurs in my beloved Canada any day. Paying it forward like that is a totally selfish thing I suppose.
I cannot help but notice that I get my largest doses of dopamine around optimistic hard-working people. Those who believe they can, those who want to change the work for the better they believe in, those who sacrifice much to achieve contagious success. I loved seeing the enthusiasm and energy of the attending platform builders, tool creators, social changers, and trend setters.
I was invited to speak on a panel on creative funding methods for startups. I get asked often and at the conference I promised to write a summary and share with as many. Here is my take.
Most entrepreneurs equate funding with the flow of cash for equity from angel investors and VCs (venture capitalists). That is wrong. First and foremost, we need to remember that the best source of funding for any startup is the dollars and cents coming from happy customers. Your north star must be building a solution to a problem that someone is willing to pay for. Hopefully many share the problem (even if they’re not aware of it) and you take your solution to the market efficiently to reap the benefits. And hopefully that will take you through pony-hood and centaur-hood to a unicorn status in reasonable time.
Build your business by getting out of the building as often as possible. Best is to build it with your potential users and customers involved every step of the way. Don’t build and expect them to come. Bring them in early on and make them anticipate and want it. Get them to pay in advance, to sign letters of intent (LoI), and to get into meaningful and mutually beneficial partnerships with you.
Today, still 77% of all small businesses get started by personal funds. Do no start pitching too early. Your ask for equity money from angels and VCs (with that order through stages) at step n must be based on what you need to succeed in step (n+1) raise. Think of bridging the gaps creatively. Some vehicles to use are as follows:
1- Non-diluting grants from government and other supporting agencies. In Canada, we are particularly fortunate on this one. All levels of government support venture creation and innovation by putting their monies where their mouth is (in most municipalities). Look for idea validation, initial market analysis, pre-seed, and seed support opportunities available to you. A good place to ask for a list is a reputable incubator or accelerator in your area. Call/email your mayor’s office, Member of Provincial Parliament (MPP), or Member of Parliament (MP). Chances are they know where they want to brag about.
2- If your startup is front-end heavy with HR (human resource) costs, think of many programs available at the intersection of HQP (highly qualified personnel) training and growth such as those of Mitacs and applicable centers of excellence as well as local employment support agencies. Tax credit programs like Scientific Research and Experimental development (SR&ED) and IRAP (industrial research assistance program) are examples of Canadian government's foresight in promoting innovation. Get involved and benefit if your projects qualify.
3- If you are a member of an academic community, explore your ideas and business creation by leveraging resources available in colleges and universities. Do make sure you fully understand the IP policies as well as other related guidelines for the use of equipment and facilities first. Most Canadian institutions now support entrepreneurial members of their community in their incubators and through their offices of partnerships and research.
4- Startup competitions (like the one at Orbit) are fantastic platforms for marketing and networking. Many have the added benefit of a cash prize. Perhaps the best part here is getting more feedback from public, investors, and stakeholders to allow you to refine your message as well as your business model. Remember you’re not pitching a product or service, rather, you’re selling a “business model”.
5- I highly recommend participating in incubator and accelerator programs. These programs are multiplying faster you can count. This is where you can have your cake and eat it too. Good programs come with training, excellent networks, and at times some seed support. Make sure you pick your growth home with care though. Do your due diligence and ensure they have the right programs, committed people, and a fitting culture.
6- Do think of uncle Joey too! According to data compiled by Fundable, only 0.91 percent of startups are funded by angel investors, while a measly 0.05 percent are funded by VCs (the total dollars invested are almost the same). In contrast, 57 percent of startups are funded by personal loans and credit, while 38 percent receive funding from family, friends, and ‘foptimists’ (we do not believe in fools). These folks can give you good needed cash only when you make sure they understand what they’re getting into. Have long and realistic conversations here and explain the risks and rewards realistically. This source of funding comes with risks that go beyond a dying venture. Relations can get ruined so do this with much love and care. People are our most precious in life.
7- While crowdfunding has been merely accounting for less than 5% of total venture funding, it is rapidly growing. Explore this path and beware of many regulatory requirements around this newer tool.
8- There are a number of alternative funding mechanisms like peer to peer lenders, micro-financing, short-term loans, etc. This one needs a lot more time and space to uncover. Ask your advisors and mentors (yep we all need a few good ones who pay it forward) and google the banana out of them to see if they concern you.
9- Strategic partnerships can be very attractive. Do not be afraid of using banks as partners and distributions channels to develop your intech idea, for example. In software for instance, you have the option of using one of literally thousands of development shops all around the globe who will give you access to a local or remote team to expedite your build for a combination of cash and equity. Post a job on LinkedIn, indeed, and angel.co and get flooded by such offers.
10- Here I want to repeat the most often thought of approach once again. Angels and VCs. Today the split of money invested by angels and VCs is very close to 50–50. Make sure you understand their approach and their needs. Raise the least amount (plus a cushion) that will get you to step (n+1) on a high balance of probabilities. And not more. Do not worry about your highest valuation as much. A too high of a valuation can actually be your nemesis. For smaller amounts, you might prefer to go for fast and efficient tools like convertible notes and debts, SAFE, KISS, and the like. You forgo the valuation for most and leave most nasty negotiations for a later priced stage.
You marry your cap table! So do much much more than swiping left or right on their names. Due diligence on steroid here.
I judged Orbit’s pitch competition alongside Ozan Isinak the president of Keiretsu Forum Canada. That was fun but not easy. We had 10 fantastic companies shortlisted from a larger set of applications pitch their products and services to win 3 cash provides and of course bragging rights. These included platforms to deliver extra- and co-curricular educational programs, tinder-style job matching, fitness, fire combatting, organic product reviews, health assistants, research productivity, sports management, as well as beauty products.
Swob, Trainer Plus, and PurPicks won first to third places, respectively. I congratulate all the presenters and especially the winners. Look forward to hearing of your explosive growth in near future.
One of the highlights of the event for me was the closing remarks by civic activist and community builder Afkham Mardukhi. I could not help getting emotional and had to fight tears back as she spoke of the mess our world is in today. From mass human migration due to violence to the extinction of many species. She passionately invited the new generation “to help fix the mess [her] generation is leaving behind”.
Are you ready to help? Take the first step today. As “the journey of a thousand miles begins with a single step.”