Wednesday, April 16, 2008

13 Seed Funding Options For Entrepreneurs

One of the most difficult parts of starting
a startup for any entrepreneur is finding that small bit of seed
capital to get things going. As evidenced by small seed funds like Y Combinator,
a little can go a long way for startup entrepreneurs, but raising that
chunk of change to get started can be tricky. Luckily, there are a
number of different roads you can take to get from concept to Series A.
Below is a list of 13 seed funding options for startup entrepreneurs.

This list is a mix of old, borrowed, new, and blue:

  1. Bootstrap from revenues. You will exit for an EBITDA multiple.
    Forget about crazy high multiples unless you have that magic formula
    that really can create high growth + low costs on almost zero capital
    -- but if you really have that you won't need/want to exit. Don't worry
    about what anybody thinks other than users and customers. No, this does
    not have to mean enterprise products; consumer ad-supported works fine
    as well -- just ask the founder of Plenty Of Fish.
  2. Self-fund on credit cards and a second mortgage. You are brave,
    maybe brilliant, and maybe stupid. Just don't expect any VC to give you
    more than words to recognize your courage. And also remember: it will
    take more capital than you think. Self-funding is not bootstrapping, it is just using your money and not somebody else's money.
  3. Do consulting on the side to self-fund. This is less risky than
    using credit cards. One partner works for a Big Old Dinosaur on
    contract for $20k per month and splits it 50/50 with the other partner,
    who builds the company which is shared 50/50 between the two. It gets a
    little more complex with more than two people.
  4. Rase funds from friends and family. This can augment any of the
    above options. Richard Branson (a man who knows a thing or two about
    starting companies) can help with formalizing the relationship to avoid emotional damage.
  5. Already a successful entrepreneur? Self-fund from cash via your
    last exit. VCs will be beating down your door to co-invest. Your
  6. Go from concept directly to $3m Series A. Wait, you did say your name was Marc Andreessen, right? No? Oh, sorry.
  7. Use angels as a bridge to Series A. This is the perceived
    traditional route. If the angels know the VCs that is fine, but if not,
    then the VCs may cram down the angels, and that's tough on you and
    those early investors that you've built a great relationship with. This
    works best if VCs tell you early, "We like the space/concept/you,
    develop it a bit and we'll be interested. MyFavoriteAngel can help you
    get there."
  8. Use angels to augment bootstrapping. You have a to show a really
    clear path to profitability that is not dependent on VC funding.
  9. Use angels as a bridge to a flip. Angels who know the target acquirers can make this a sweet deal for all.
  10. Spray and pray models. A fund or incubator that puts tiny sums into
    lots and lots of ventures in hope of finding one star in the bag (see this post). Sounds a tad random to me.
  11. Seek out founder-only evergreen seed funds. These are slightly more
    formalized versions of angel networks that aren't managing other
    people's money (i.e. LP=GP). Exits get re-invested into the fund, so
    there is no fixed time horizon for exit. There should be more of these.
  12. Get a convertible loan from a VC to develop your concept to a level
    where Series A is appropriate. Charles River Ventures led the way with
    their CRV Quick Start program. More of these would be great.
  13. Check out one of the paid links when you search for "seed funding" on Google. Not.

The good news: I planned my usual 11-point list and had to go to 13
(well 12, if you leave out that last one -- which you shouldn't). The
bad news: none of these options are easy. But then, you already knew
that, right?

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