I received this question over the weekend via my ask-me form on timberry.com. I modified it slightly to not include private information. It’s about a web software business. It reads …
… we are gaining traction. Financing is difficult. I am looking to find out what resource you would recommend to get financing for the project. Investment would probably be 100-250k. Would like to go to privates like doctor’s groups but please direct me.
I’ve written a lot about angel investment on this blog and on financing a business in the main articles section on the parent site, bplans.com. Check out particularly this article, the right funding for your business type, which talks about the main options and gives you some basic definitions to work with. And consider these 5 points:
- Narrow your number. Project sales, cost of sales, fixed costs, spend before launch and development costs and come out with what you think you need. Everybody knows it’s just a guess. But there’s a huge difference in options between $100K and $250K. Name your number and have projections to defend it. Yes, that’s part of a business plan.
- Generally it takes as much legal hassle and legal fixed costs to invest $100,000 as to invest millions.
- If you have to ask about venture capital, you’re not a good candidate. Don’t feel bad about it. Venture capital is very rare, usually goes to high-profile startups led by people who’ve already done it. And the amount you need isn’t enough to interest standard venture capitalists.
- If really have what investors want, you understand the hard truths about startups and investment, and you still think you’re a good candidate for angel investment, go to gust.com, sign up as a startup (it’s free), watch the videos, read the blog posts, and get going.
- If angel investment isn’t likely, then start looking at what they call friends and family, which is what you call doctor’s groups. Talk to your nearest Small Business Development Center (SBDC) (you can find info on these at asbdc-us.org.) The best advice I’ve heard on this is to start asking everybody who they know who might be interested. Don’t ask anybody directly; ask who they know. That’s less awkward and more effective.
If that doesn’t seem to be getting you anywhere, you should probably read these 10 reasons not to seek investment. And finish up with 5 non-traditional ways to get startup money.
Like Tim notes, you may not be a good candidate for venture capital. I would recommend, since it is web software, to go and up-sell to your customers. One way would be to immense yourself into lead generation and have the free trial option which expires in a given period. If your leads sign up, you will be in a better position to convert them into users. Generally software is an EXPERIENCE GOOD: a product that needs a period of use before the customer can determine the value they can derive from it.
For us at Hallspot, we were able to get a meeting with an angel investor, and we really sold our potential. We were pre-product during the meeting, and really I think we got lucky to get funded pre-product. From that first seed round, we were able to raise a 2nd round, but I think what has been really important that we’ve done has been leveraging that angel investment into now pending VC stage investment. We were able to go out and use our initial investor’s connections and network to position ourselves for a potential Series A in Q2 of this year – so in our case we’ve been lucky and smart about looking for funding.