What if you have an idea but no money? Private investor and co-founder of NappyClub Anton Anufriev offers possible options based on his experience.
Opportunities to find financing at an early stage of the project, it is not so small. It’s important to understand which ones are right for you, what are their pros and cons.
1. Classic FFF (friends, family and fools)
Speaking in Russian – people who are familiar with money, family and people who do not have venture capital experience, but want to invest in a startup.
Where to look for the first and second is understandable without much explanation. The latter are more likely friends of friends and are difficult to recommend. In addition to their lack of experience, there is a risk of getting people who are far from your values or understanding the riskiness of venture capital investments as co-owners of the company.
We ourselves started the NappyClub project for nine million rubles, provided by our friends. This, of course, is a serious amount, and it allowed testing more strategies at the initial stage. In most cases, friends and acquaintances are ready to lend up to a million rubles. But often this is enough to form a minimum product (MVP) and test a business model.
The undoubted advantage is that this type of investor is initially more loyal and does not require complex procedures for processing transactions, prescribing KPIs, detailed reports and presentations. The main risks are to spoil relationships with loved ones if the startup does not take off. And it can be very painful for both you and them. To be on the safe side, it is important at the very start to clearly outline what you plan to do with the money received and what scenarios for the development of events are possible up to a complete loss of money.
2. Business angels
Professional or aspiring private investors. They invest personal money – as a rule, in the early stages of project development. You can find the largest of them by googling the rating of Russian business angels. As a rule, they write themselves on their social networks how best to contact them. The rest live at startup exhibitions, hackathons and other themed events. And here it is important to be able to quickly and efficiently tell about the project.
Be polite, concise, and don’t argue. At the very least, these people have already earned enough money to invest. And as a maximum, they have seen and participated in hundreds of projects and can quickly assess which of them will take off and which will not.
And finally, if there are no angels in the flesh nearby, you can try to look for them on specialized world sites, such as Angel List, Startup Point or Pitch Book. This is how the ticket service Ticketforevent.com, familiar to me, did in due time, having received funding to enter a new market.
3. Classic crowdfunding
This is raising money for the implementation of a project from a large number of small investors interested in your product. In other words – with the world on a string. There are professional sites where you can post a description of the project and where there is already an audience of people willing to finance a startup: Russian BoomStarter and international Kickstarter, Indiegogo, Fig.
So far, crowdfunding is not very popular in Russia as a method of financing business projects. Basically, social and charitable initiatives show good collections. On global platforms, both the audience is larger, and startups are more serious. There are projects that have grossed tens of millions of dollars, such as Kingdom Death: Monster or the Coolest Cooler.
If you decide to give it a try, be prepared to spend up to six months preparing an ad campaign.
And it is important to understand that without a large community, a well-known founder or marketing guru in the team, the chances of collecting serious funding on such sites tend to zero.
An alternative option is to throw a cry to the whole world through social networks and blogs. If you have a lot of loyal followers, then this can work out. This, for example, was done by Fedor Ovchinnikov, attracting primary investments in Dodo Pizza.
4. Crowdfunding through loans
For example, through the services “Alpha Stream” and StartTrack. A suitable option if the project already has sales. Such sites gather a pool of small investors who are ready to give syndicated loans to startups. Interest rates are higher than bank rates, terms are shorter, but collateral is not required and registration is relatively quick.
Suitable for projects with high turnover and corresponding profitability, but without fixed assets.
5. Ordinary loan with collateral of own property
This, of course, is hardcore and the risk of losing everything if the startup does not take off. But if you have confidence in your abilities, this option is, in my opinion, the most correct and will seriously raise the credibility in the eyes of investors at further stages of financing.
As a managing partner of a small investment fund, I myself, all other things being equal, will choose the guys who put their money and assets at stake for the success of the project.
In this case, they will, firstly, be much more responsible for the costs, and secondly, they will fight for the project to the end.
If the amounts are large, and the project involves the acquisition of fixed assets that can be used as collateral, it is advisable to consider project financing programs from banks. To do this, you will need to protect a detailed financial and business plan in front of the bank.
6. Subscription of customers to a product before the appearance of a B2C product
In this case, production or purchase is carried out when the amount is sufficient to start. It looks like crowdfunding, but does not require special platforms or great popularity in social networks. Basically, we are talking about pre-sales.
Developers are very fond of using this method when selling future apartments at the stage of project documentation. Unlike some bad developers, always keep promises or give money back.
For grocery startups, you can create a landing page and collect a subscription for orders with delayed delivery, or use the co-purchase mechanism (collecting an amount sufficient for a bulk lot to get a volume discount). Large funds cannot be raised in this way, but it may be enough to order a test batch. At the same time, you will test the demand, up to real costs.
7. Obtaining project financing from potential clients
If you have a B2B startup (the main clients are companies, not individuals), try to go for funding from large companies that may be interested in your product.
Nobody promises that it will be easy. And for everything to work out, the product must be unique or increase the marginality of the potential customers’ business.
It is important to have test samples and a well-calculated presentation in terms of financial and feasibility.
In the States, such stories are very common. Thus, Bill Gates started the multibillion-dollar and dearly beloved Microsoft, having received funding for MS-DOS from IBM even before the product was available.
Our companies are more careful. But if you have experience, a name in the industry, and the company needs a product and it is easier to make it with your own hands – there are chances.
8. Obtaining financing from production
It can work if you have a startup about product sales and manufacturers are interested in entering new markets or reaching a new audience.
At first glance, this method may seem practically unrealizable. But this is not the case. We ourselves have used it successfully. Our diapers are manufactured in several Asian factories that work with premium European and Japanese brands such as BASF and Sumitomo.
In 2017, we expanded our assortment, introduced new panties, and the production was so interested in entering the Russian market that we managed to achieve a delay in payment, allowing us to pay off the proceeds from the sale of goods.
9. Exchange of shares in a startup through options for necessary services
Funding for a startup is needed to receive certain services that allow it to grow. Why not exclude money from this chain? If you have a strong enough reputation and a promising project, you can always pay with shares in the company. Most importantly, do not forget about the cliff and vesting formula for employees (Google will help).
The method is suitable only for those whom potential contractors or employees can trust one hundred percent. And this is one of the reasons to always work for an honest name – it will feed even without money.
Facebook once paid with its shares for the design of the new office. Mark Zuckerberg received the fashion artist’s graffiti. And the artist David Zhou -share, which when Facebook entered the IPO began to cost $ 200 million.
This is our everything, because unlike angels, startup accelerators can not only finance the creation of an MVP, but also teach business processes, deliver sales, and then present them to late stage investors.
In Russia, the most famous accelerator is IIDF, in the west – Y-combinator, 500 startups and TechStars, in Asia – SOSV and Chinaccelerator. The goal of the accelerator is to speed up the test period of a startup by teaching founders to test business hypotheses, sell, and ultimately understand if an idea will take off. And it only takes 3-6 months. Plus, accelerators always have a large circle of partner investors who are ready to pick up projects at more “adult” stages of financing.
IIDF, for example, for investments of 2.5 million rubles take share of 7% of the project. It’s up to you to decide whether it’s a good deal or a bad one, but accelerators can certainly teach you a lot.
11. Grants and competitions
Another tool that allows the best projects to receive funding. Grants are usually aimed at accelerating the development of certain industries or technological areas. They do not require payment, but they require winning the competition and strictly following the program of use after receiving funding. From the point of view of flexibility, this is a disadvantage, since you will not be able to dramatically change the direction of a startup. But from the point of view of the cost of money, it is the undisputed leader, because you do not need to give any shares, grants themselves, or interest for their use.
Be careful with government competitions and grants, as everything is very bureaucratic. But there are also commercial ones: from large companies, universities (Innopolis) or venture capital giants.
We did not use grants. But one of our portfolio projects Avatrip.com received a Start Fellows grant from the head of the DST fund Yuri Milner and the creator of VK Pavel Durov. I recommend choosing those grants for which your project is most suitable, and strictly adhere to all the conditions for participation in the competitive application, since it is for them that candidates are selected.
12. Venture funds and private equity funds
This is what many start with, although, in my opinion, it is more correct to end with this when all other methods of obtaining money have already been used. For the investment of the fund, you will give a significant share in the business and part of the control over it. The later you do this, the better the business valuation will be and most of it will remain with you.
Therefore, it makes sense to go to venture funds only after finding a working business model, with an understanding of your economy and convincing historical metrics of business development.
The funds are interested in a strong team that has proven its competence, a large market and the potential for rapid growth of the project capitalization. Accordingly, such money is advisable to obtain financial leverage for accelerated scaling.
The list of Russian venture capital funds is easy to find by googling ratings compiled by many business publications. I recommend examining their portfolio to see if they are investing in businesses like yours. It is useful to read the interviews of fund managers, find out how they select projects, what they consider important. It is better if at the first contact your project is presented by someone with whom they have already worked. But if there are no direct contacts, you can write or leave applications through the channels indicated on the site.
An alternative option is to participate in targeted events: venture conferences, exhibitions, hackathons. It is not uncommon for foundations to hold pitch sessions there for startups or study exhibitors. Thus, at one of the venture conferences, our portfolio project Expopromoter met with a large Russian fund and received an investment offer.
13.ICO or Tokensale
What a year ago was a new and disruptive way to get investments has now turned into a dubious story that most classic funds avoid. Initially, the ICO was carried out only by projects related to the blockchain. But at the peak of popularity and easy fundraising, many startups have learned to attach the blockchain label to anything and raise money for dating, cats, sandpits and other exciting goals.
In the case of ICOs, it is important to understand a number of things. First, in order to raise a lot of money for something unnecessary, you need to spend a lot of money first. If at the beginning of 2017 the cost of the ICO campaign was$ 20-50 thousand, now the amount begins from $ 500 thousand. And listing on large exchanges, without which there will be no liquidity of the project’s tokens, costs millions of dollars.
Secondly, there are huge legal risks. In most countries, there is still no clear ICO legislation.
There is always a possibility, even when acting in the most trustworthy way, as a result of the ICO, to face the law. As, for example, happened in China, where in September 2017 the central bank wrote a directive according to which it canceled all previous ICOs and demanded that the collected money be returned. It is rather difficult to imagine how local entrepreneurs returned them, given that up to 20% of collected funds can be spent on ICO in the form of various commissions.
Thirdly, ICO is a public event. Having successfully conducted it, you tell the whole world who has money that the state does not consider as money and does not protect. The costs of a face-to-face meeting with a thousand upset investors in the event of a project failure can be ignored.
In general, if you are from a real blockchain, then you yourself know everything, and if not, then it’s better not.
The choice of a specific development option depends on the characteristics of the startup. Based on my ten years of experience in investments, I can say that you can effectively combine various methods of obtaining financing.
This is exactly what we did with NappyClub. We started with investments of friends and angel investments, thus we tested the business model. Then we got financial leverage from production, where they placed orders, which allowed us to expand the product line. When tangible sales appeared, they increased working capital with loans.
It is not necessary to try to close everything at once with one source; it is better to move progressively, in accordance with the stages of the startup’s development. First, get enough funds to create a minimal product and test your idea. When the first results appear, it will be easier to attract funding. This is the most logical and cheapest option.
There is no need to rush to get direct investments from funds, since they are the most expensive when transferred to the cost of capital. It is better to grow a business first and only then go to funds with a normal assessment and an understandable model.
Article translated from Rusbase