Funding your startup

Once you get past the idea stage and have something that you think is worth pursuing, what are the next steps?

Bootstrapping

You can choose to build your startup idea on the side while you are working full time somewhere. One of my friends Vivek Bhaskaran founder of QuestionPro got started this way. He has a fascinating story about how he got started.

While some get started this way - its hard to pull this off. Mainly because:

1. Work gets in the way. You are not as productive after working 8-10 hours at regular job.
2. Working a few hours a day or weekends will not get you very far. In this internet age, you should assume that someone else ( maybe a couple of 22 year olds :) ) is working on the same idea and working full time on it. They will make more progress in a week -eating and sleeping with the idea than you will in a month.

Of course you could get creative and use some of your salary to get an offshore team going. E.g. if you are making say $10k here, you could fund 2 developers offshore for about $6k.

After a few months - get to the hard question - Do you quit? For most folks - this is the hardest part - jumping off. Hopefully you have found a co-founder .

If it's two of you and you are both technical, then you could start building the product. Most startups will have founders who have mainly product/technical skills.

If you need to hire additional people - what do you do? The first thing you should do is see if you can find folks who can do this cheaper - e.g. Offshore development might be an option. That way the amount of funding required is lower. However offshore development for startups is hard.

Nothing in a startup is typical. Having said that, here are the common models for funding your startup:

Consulting

• You can try to consult while building your startup. This is hard as it takes away focus from building your startup

Self Funding

• If you and you co founder can put in any money, this is an option. The good thing about internet startups is that you can launch for very little so you don't have to take huge debts like before.

Friends and Family round

• You or your co founder could get some friend or family to invest some money. Unless the friend or family angel invests in startups, it can be tricky - mainly because it puts an enormous burden on you. Startups are stressful as it is.

Seed Round

Angel Funding

• There are folks who invest their own money in startups and in fact some who do this prolifically. Reid Hoffman ( Linkedin Founder) has probably invested in over 80 startups.

Super Angels and others

• Y Combinator, Founder Institute etc. can provide some funding and help you get your startup off the ground
• There are angel funds like Floodgate that Mike Maples runs, which can invest in your startup and help you get a bigger round later. Mike has invested in a whole bunch of successful startups including Chegg, Spiceworks, Twitter etc.

Sometimes folks write a convertible note that gives them a certain discount of the Series A round. In some cases (esp. if a VC does a seed round) they get equity- say your company is worth $1mm and 500k will give them 30% of company ( valued at $1.5mm post). Many angels sometimes also like to put time limits on the date of Series A financing. ( So you don't go years and all they have is a note).

VC Funding

This takes a lot of time and effort. Less than 10% of startups get VC funding. Also it's not for every business. For e.g. if you found a niche say dating business for Blackberry fans and the market is $20 million at best. VC's likely won't be interested.

By far this takes the most amount of time and you do this mainly because it lets you raise lots of money in one shot instead of say raising $3mm from 15 angels.

VC's will value your business pre and basically take that equity. Typically they want atleast 30%. So if you go in at series A looking for $3mm, you will likely get valued at $3-6mm pre and that gives them 30-50% of your company later. There are lots of other things to consider (board seats, liquidation preferences etc. etc..). Usually you and the VC will both have separate lawyers to help you draft this ( and their lawyer fees come out of the funding amount :) )