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Bootstrapping is difficult. Investor funding, if done incorrectly, can become a time bomb. So, what direction is best?
Often, businesses start off with the founders funding them completely. Only a handful of startups are funded in the idea stage. Things can get tough along the way, and often, you’d need to choose whether to continue scratching to stay afloat or seek external funding.
It’s a tough decision to make. On one hand, founders want to maintain substantial control of their projects. They also don’t want the pressure that comes with handling investors’ money. On the other hand, startups need money to survive and grow to their potential. This is what Harvard professor Noam Wasserman termed “The Founder’s Dilemma.”
As a founder, you need to know when the time is right to seek and collect investors’ money. This article answers that question.
1. Figure out a working model first
It might fascinate you to know that investors are always ready to sign checks whether the idea looks viable or not. However, investors can put you on a very short leash when they know that your idea isn’t practical enough. They do this by requesting ridiculously high equity.
As an alternative, you need to perform all your preliminary experiments and find the exact business model that works for you before speaking with investors. It’s no news to founders, though, that finding a working model is not a walk in the park and that experiments often require some capital.
In the earliest stages, you need to self-fund your idea as you take it through refinement. With inadequate capital, you should consider reaching out to family and friends for support. They are bound to believe in you more than total strangers with fat checks. Nearly 40% of founders follow this route.
2. Create an MVP
It’s rare for founders to focus completely on one aspect of a startup. Often, they have to oversee business development, product development, finance and every piece of the project simultaneously.
While figuring out what variation of the business model works best, founders need to also ensure the product development works out successfully. Until then, it’s best to stay away from outside investors.
However, some products are capital-intensive and will need big checks to fund them. In such cases, it’s advisable for a founder to create a prototype or a highly specific graphical rendering of the product.
This provides a crystal clear description of how the product works and conveys some level of confidence to outside investors. With a prototype, your chances of landing an outside investor under favorable terms increase significantly.
3. Ensure it’s time to scale your idea
You may have an MVP and a model that works on paper, but all those don’t matter until you’ve acquired a few real customers that are willing to pay for your product. By “real customers,” I’m not referring to family relatives and friends.
If you have a few complete strangers paying to use your product, then you most likely have a practical model and valuable product. At this stage, you need to ensure that your business process is well-documented and can be recreated without smack-dab supervision.
With all that in place, you can seek outside investor funding to hire more hands to recreate the process en masse.
I often advise founders to look beyond securing investor funds. Founding a startup is one stage of your career, and the way you approach outside investments can have a significant impact on your reputation in the long run.
Investors prefer to put their money on founders who have proven records of good investor relations and business success. So, if you’re looking to secure your first-ever funding round, be sure to do it at the right time to avoid jeopardizing your entrepreneurial career.
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