Here’s a question I frequently get from young entrepreneurs: “How do I fund my new mobile startup business?” After all, you might have an excellent idea and, perhaps, a small team who would love to create a business out of the idea. But you don’t have the funds to build the product and bring it to market.
Some successful serial entrepreneurs may have enough capital to do the initial funding of their next business, but even if the entrepreneur has the funds to start a new business, he or she will want to bring in other investors to share the risk and more quickly expand the business. So, even wealthy entrepreneurs have to approach other investors at some point.
Obtaining the capital from investors is a viable way to get your business off the ground, but you need to follow some guidelines if you want to successfully raise capital. Here’s what you need to know.
Create a business plan
The first thing you need to do is create a business plan that outlines what the new business is going to do and how it will become successful. However, a plan by itself is not adequate to get funding. You’ll need to demonstrate to your investors that the product or service you’re creating solves a problem (often called the “pain point”).
The first question investors typically ask is, “What problem are you solving?” Then they ask, “So, why is someone going to buy your product or service? What information do you have that demonstrates that people will at least want to use it or are willing to spend money to acquire it?”
There are five stages that entrepreneurs typically go through in order to find the necessary capital to get a new business going (generating revenue) and profitable. It’s important-before you approach any investors-to define as well as possible the total capital it will take to make the business successful on an ongoing basis under normal economic conditions.
In economic downturns such as the one we’re currently in, it is actually a great time to start a new business. Costs are relatively low, talent is more readily available and you can likely grow quickly via partnerships. If you have a good idea and a solid plan to make it successful, then funding will come your way.
The process where plans are presented to investors is an excellent way for the market to “weed out” those deals that don’t have a solid foundation. Successful ideas with strong management always get funding. Remember that the number one thing that investors consider is the strength of the management team. An excellent idea with a weak team will never get funded. An excellent idea with a strong team will always get funded.
Sources of Capital
Sources of capital
Here are the sources of capital that you need to consider to get your new business funded and off the ground:
Personal funds: Many entrepreneurs often don’t realize that they have to invest some of their own funds. If the approach is that the entrepreneur will only consider other people’s money, then the other people will own most-if not all-of the business. This stage is typically focused on producing a demonstration or prototype and doing some market research that demonstrates that there’s demand for the product or service.
Friends and family: The most important stage of a young company is get someone else beside yourself to believe enough in what you’re doing and provide additional capital. This stage is often used to build the product so it can be put into the market.
Angels: Angels are investors outside of your circle of friends and family that operate on an individual basis to provide capital to “pre-revenue” ventures. The purpose of angel investors is, typically, to get a company operational and generating revenue. Often, this isn’t to make a profit but, rather, to demonstrate that revenue can be generated and to learn and refine the sales process. Most angel investors want to buy an early stake in the new company so they can see their investment grow in paper value via a subsequent round at a higher price.
Institutional VCs: In the old dot-com days, you could get funding for an idea on the back of an envelope over lunch. But today, institutional investors typically want to see that a business has already generated some revenue or, if it is still pre-revenue, that there’s enough information to believe that revenue growth can occur very quickly. Institutional investors typically purchase preferred stock in the company, giving them preferred rights on acquisition or liquidation. When a business succeeds and either goes initial public offering (IPO) or is acquired, the kind of stock may not make any difference.
A typical rule of thumb for institutional rounds is that they will buy 40 to 50 percent of the company in return for their putting up sizable funds. Some successful ventures do much better (for example, in October 2007, Facebook sold 1.6 percent to Microsoft for $240 million, which valued the company at $15 billion).
Also, don’t get too caught up on trying to get a high pre-money valuation. The higher the valuation, the greater the demands that the VCs expect. They always want to achieve a goal of 10 times their investment in five to 10 years.
Strategic investors: These are typically your partners that are helping you gain success in the market. Often, a partner will see the benefit of the future value of your business and will offer to either invest alongside the institutional investor or will make a separate investment. Strategic investors will typically not be as sensitive to the price of the investment as institutional investors, but it can take longer to settle.
It takes a lot of work to start a new business. Sometimes when you have setbacks, you need to regroup and try again. Often there’s a successful business out there but you simply need to go about it differently.
Please remember one final thing: Yes, celebrate your closing the new investment with a glass of champagne. But realize that the investment isn’t the endpoint. Rather, it’s the beginning. The real work starts after you get the investment. Put your investors on your team. Get them to help you out and keep them informed.
I wish each and every one of you who wants to start your new business great success. You have to have a good idea, be very committed to it and surround yourself with excellent people if you want to succeed. Remember, the best days of mobile and wireless are still in front of us. The best businesses have not yet been created.
I hope to write about many of your great, successful ventures in future Inside Mobile columns and, possibly, become a member of your Advisory Board!
J. Gerry Purdy, Ph.D. is Principal Analyst of Mobile & Wireless at MobileTrax LLC. As a nationally recognized industry authority, Dr. Purdy focuses on monitoring and analyzing emerging trends, technologies and market behavior in the mobile computing and wireless data communications industry in North America. Dr. Purdy is an “edge of network” analyst looking at devices, applications and services, as well as wireless connectivity to those devices. Dr. Purdy provides critical insights regarding mobile and wireless devices, wireless data communications and connection to the infrastructure that powers the data in the wireless handheld. He is author of the column Inside Mobile & Wireless that provides industry insights and is read by over 100,000 people a month.
Dr. Purdy continues to be affiliated with the venture capital industry as well. He currently is Managing Director at Yosemite Ventures. And he spent five years as a Venture Advisor for Diamondhead Ventures in Menlo Park where he identified, attracted and recommended investments in emerging companies in mobile and wireless. He has had a prior affiliation with East Peak Advisors and, subsequently, following their acquisition, with FBR Capital Markets. For more than 16 years, Dr. Purdy has been consulting, speaking, researching, networking, writing and developing state-of-the-art concepts that challenge people’s mind-sets, as well as developing new ways of thinking and forecasting in the mobile computing and wireless data arenas. Often quoted, Dr. Purdy’s ideas and opinions are followed closely by thought leaders in the mobile and wireless industry. He is author of three books as well.
Dr. Purdy currently is a member of the Program Advisory Board of the Consumer Electronics Association (CEA) which produces CES, one of the largest trade shows in the world. He is a frequent moderator at CTIA conferences and GSM Mobile World Congress. He also is a member of the Board of the Atlanta Wireless Technology Forum. Dr. Purdy has a B.S. degree in Engineering Physics from University of Tennessee, a M.S. degree in Computer Science from UCLA, and a Ph.D. in Computer Science and Exercise Physiology from Stanford University. He can be reached at [email protected]
Disclosure Statement: From time to time, I may have a direct or indirect equity position in a company that is mentioned in this column. If that situation happens, then I’ll disclose it at that time.