By Surbhi Lohia, TiE Silicon Valley
We all have heard of the Kickstarter success story Pebble. Founder of Pebble, Eric Migicovsky, had set up an initial goal of $100,000 on Kickstarter to develop his idea of a “smart watch”, but was amazed when nearly 69,000 people invested in the project, raising a quite astonishing $10,266,845 within five weeks. Pebble, and many other products such as Ouya and Oculus Rift, would have only come to life with the support of websites such as Kickstarter and Indiegogo, which enable developers to seek funds for their projects with little effort. Though we are aware of the companies that successfully raised money for their ideas, not all companies are fortunate enough to hit it big within the competitive crowdfunding atmosphere. Crowdfunding, venture capitalist funding, and seed funding are some of the many types of funding that are available for developers and entrepreneurs who are just starting out their business. Some types of funding may work better for certain types of companies – read below for effective funding strategies for your startup!
Crowdfunding websites are taking the internet by storm and attracting startups and entrepreneurs due to the ease in which they can collect funding. The concept is simple: outline your project in a video, making your product as attractive as possible, and then ask those interested to support the idea through monetary donations. Crowdfunding is ideal for startups selling a physical consumer product, where donors and investors can receive some type of perk after donating rather than an actual stake, in the form of stock or equity, in the company such as the VC model. Software and service startups may have more difficulty in attracting attention and dollars from mainstream consumers through crowdfunding. Crowdfunding fills in the gaps left by venture capitalist funding, in which one must have connections and wait extended periods of time to receive funding. Crowdfunding is ideal for a company looking to make small money fast, typically under a million dollars.
To receive more traditional venture capitalist funding, a company has to be somewhat well-established before it seeks funding. VC money can’t get you from $0 to 1 million without a lot of effort. To even be considered for VC funding, a company must validate the market, gain traction, and show that it has the ability to execute the founders’ vision. Companies need to have built themselves up already to be able to prove their future worth- since this is the only way a VC will invest in them. Venture capitalist investors and firms tend to lean towards companies that have the potential to become extremely successful and lucrative. Though VC funding may be hard to get, it comes with many benefits. “Venture capitalists write the bigger checks. VC firms are trying to help you succeed. They bring a lot of value add to the company- everything from introductions to helping the company strategize, continuing to stay on top of the company and help the company along,” says Prashant Shah, former VC and current managing director of TiE Launchpad, the startup accelerator hosted by TiE Silicon Valley. The VC model also serves as a mentoring system in many ways. Venture capitalists become a support structure beyond financing, helping companies get their name out, build connections, recruit, and market to a wider audience. When looking for a guiding path, support system, and big money to fund your large company headed for success, venture capitalist money is your way to go.
Another form of funding, similar to venture capitalist funding is seed funding. Seed funding is when angel investors fund companies right from the beginning who have no means of getting started and putting their ideas into action. Seed capital could be used by a single individual to get his or her business off the start-up line and lift a company to the point at which it can move into VC funding. TiE Launchpad works in a similar fashion. “In those very early stages of a company, before they have enough milestones to prove they are ready for the VC funding, they get that same experience – they get the mentoring, the deep relationships, introduction to customers, potential hirers, deep strategic thinking as well – they get all this, but in the early stages when they still need to build up their milestones. It’s the VC model at a much earlier time and stage of these companies,” says Shah as he explained the mission of TiE Launchpad. While in the early stages of your business, maybe with even a simple idea, an accelerator such as TiE Launchpad or other forms of seed funding would be most effective in transitioning your company to the venture capitalist stage.
The best funding to go for isn’t just a simple black and white answer. After assessing your product, company’s goals, and amount of funding you need will you only be able to determine which funding would work best for you. One type of funding may work better over the other. In some cases one may need to pursue a combination or all options. TiE Silicon Valley can help determine which type is best for you through mentoring and events and even provide funding for startups through angel investments.