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Funding 101

Ideashares Fundraising Module

The 5 Steps of Fundraising

As you start down the road to success as an inventor and entrepreneur, it's vital you learn the basics of raising capital. We've taken time to put together an outline of what you need to know and the steps to take in the difficult world of raising capital.

Step 1: Get Educated

    Should I Raise Money?

    (The Pros and Cons)- To Raise or Not To Raise, that is the question that vexes all entrepreneurs.

    Pros:

    • Money to drive the business model
    • The Power to execute on your ideas
    • The IP and Wisdom that may come with Investors
    • The opportunity to focus (full time) on the idea/company

    Cons

    • Lose a portion os. There are positives and negatives to both, let’s examine a few of them here:
    • Ownership in an Equity Raise
    • Potential to lose control of idea/ company
    • Pressure of repayment/ valuation and revenue goals
    • Personalities of the Financier(s) creating internal issues

    What do I need money for?

    Do you really need the money? Have you developed a budget? What are your costs for the stage of Ideation that you are in? An Entrepreneur, Ideator or Inventor must have a good understanding of what the use of proceeds would be long before they raise money. This is a valuable step before setting sail on the actual raise.

    Is my idea fundable?

    Better yet, is the idea good at all? Is it relevant? Is there a market for it? Is there competition? Do you have the team to execute? What stage are you in? All of these questions are a must before even considering funding.

The 7 Pillars

    Ideation

    Perhaps the most important part of the process. We all know that without execution, ideas are useless, however, there is nothing, nada, zip without first a seed of an idea that can be attributed as Intellectual Property!

    Evaluation

    Product/concept evaluation must occur on multiple levels, in a dynamic manner to get the most accurate and reliable outcome. The missing ingredient to the success formula for new ideas is often the absence of advice. (Protection)- In an era where ideas are stolen every second, one must be very knowledgeable about IP Protection and Execution. These fine companies and firms specialize in protecting every facet of the innovator’s protective rights and liberties.

    Research & Design

    Develot often should not be tackled alone. After determining whether or not a product/concept possesses the value and merit sufficient to justify market pursuit, Research and Design (R&D) can be the most crucial Pillar in the deveping the idea to its most effective form is a rigorous process and one thalopment phase. Branding and marketing can overcome a lot of mediocrity, but only for the short term. Well executed R&D has the potential to turn mediocre into good, and good into great. Conversely, poorly executed R&D can turn great into mediocre on its way to catastrophic.

    Manufacturing/ Prototyping

    Manufacturing has a lot of moving parts, and can range from simple assembly of existing parts, to building custom molds and full production lines for specialized material processing. It is important to develop and maintain relationships with manufacturers across material lines. This provides a lot of human resource benefits, as well as real time costs, current best practices and manufacturing lead times. Even as a licensor, you will need this information, and the benefits it/they provide. This not only opens doors for identifying potential licensees, it also give you the data information and scope of work to make expansion, as a licensor or a “general” contractor substantially more feasible.

    Branding/ Marketing

    Brilliant branding and marketing can generate enormous profits and exposure. While the product itself is always the most influential in terms of value, this Pillar will absolutely make the difference between success and failure. The product must “have a niche,” “fill a need,” “provide a valuable service,” A strong branding and marketing strategy can leverage the product’s strength(s). Again, the opposite result, having little or no strategy, can turn a brilliant/valuable/convenient/ idea into an ill-conceived expenditure of resources. The spectrum of developing a branding and marketing strategy can range from first to market, to securing market share within an existing competitive market environment. While media placement remains a science of its own, the advent of social media has created a new market and opened an entirely new frontier for marketing.

    Sales/ Distribution

    Product licensing should always be considered as a viable option. A licensor’s typical duty is to collect checks from the mailbox. However, there are a variety of ways to structure a licensing agreement, which can allow for co-marketing and product development. There are also a wide variety of sublicensing options available, as illustrated in the above categories.

    Affiliate sales are essentially structured as an online community of e marketers that provide their own marketing and advertising to sale products and services created by others. The Beer Machine could be “funneled” through an affiliate program, however, high dollar items usually fair better in a more traditional from of marketing, whether it be online or “brick and mortar.”

    Distribution channels include wholesale, retail and B2B, as well as online “storefronts” for a buy in demand option. Individual retail outlet relationships can also be negotiated, and Tradeshow affiliations providing for “direct” order placement and subsequent payment would be an excellent option for this product as well.

Step 2: Decide On Type of Financing

    Funding Ecosystem

    (Self) - The easiest form of securing funding but usually not the most effective as all of the responsibility and risk is solely on the shoulders of the founder/financier. The positives are the absence of dilution and full control but unless you are independently wealthy or only funding your pre seed/ seed round, self-funding is rarely an option.

    (Natural Sphere) - Many people call this the Friends, Family and Fools round. Where it is always is nice to have a less than stringent process for funding, working within your natural sphere and with mostly non-accredited and less sophisticated investors can present a myriad of problems.

    (Crowdfunding) - While more traditional funding alternatives remain strong options, the online public and private crowd funding platforms offer an expedient while sophisticated option for funding. Public Crowdfunds offer the strategy of being supported by your natural and targeted market cultural element. Private Crowd funds provide another level of sophistication and a higher investment dollar concentration.

    (Angel investors) - Angels were once thought to be the saviors of companies that were in trouble or wanted to grow. The term “Angel Round” or “Angel Investor” has now become synonymous with the post seed Investment from an individual or group of accredited investors who believe in an Idea’s or Company’s capacity for growth and above traditional Investment returns. Capital raised in this form is often in exchange for Equity or Convertible Debt

    (Venture Capitalists) - Similar to Angel Investors but they often have become synonymous with the “Series A” round of funding where the Idea and Company have not only accumulated clients and revenues but the business and profit models have delivered on a viable proof of concept. VC’s are interested in risk and high reward potential but their level of sophistication and size of their investments are usually much higher than that of an Angel’s. Venture Capital Investments are also often in the form of Equity or Convertible Debt.

    (Banks) - Banks offer the cheapest way to raise capital but since 2008, the ecosystem has become very stingy with its cash and the banking world’s appetite for anything other than investments that are asset-backed and carry collateralized personal guarantees, has all but dried up.

    5 Levels of Funding

    Level 1 - (Pre Seed Level)

    You are just getting started and costs begin to arise. The best way to fund this round is to “self fund” as your valuation for your idea/company will most likely never be lower than it is at this moment. The range of financing here is usually between $0-$25k.

    • You Have an Idea
    • Its Pre Proof of Concept (No MVP or Working Prototype)
    • Pre Clients
    • Pre Revenue
    • Pre IP Protection
    • Use of proceeds is for proof of concept and minimum prototype

    Level 2 - (Seed Level)

    You actually have drawings, a web site or a self-created prototype of sorts that help to illustrate the idea, problem to be solved and revenue opportunity. Most Entrepreneurs and Ideators begin to look for funding here. The range of financing here is usually between $25k-$100k.

    • Proof of Concept (Limited, Very Limited Prototype)
    • Pre Clients
    • Pre Revenue
    • Pre Protection
    • Use of proceeds is for MVP/ Full Prototype/ Branding/ Protection

    Level 3 - (Angel Level)

    You are now open for business and the product or service is being sold into the marketplace. You could be at a maturing stage here or still in rapid development. Either way, you need money for growth. The range of financing here is usually between $100k-$1,000,000.

    • Full MVP (Working Minimally Viable Product)
    • Post Clients
    • Post Revenue
    • Post Protection
    • Have Capacity or are Executing a Viable Business Model
    • Use of proceeds is for further Product Development, Research and Design, Sales, People and Awareness (Further Branding and Marketing).

    Level 4 - (Venture Level)

    You have most likely turned the corner of profitability or viability in the model. You are now looking to break into new markets or purchase awareness. The risk is lower but the same growth potential desired for investors and partners still remains. The range of financing here is usually between $1,000,000-$10,000,000+.

    • Product or Service is Well Developed
    • Established Client Base
    • Strong Revenue Model
    • Large Growth Potential
    • Use of proceeds is for further Product/Service Development, Marketing, Large Scale Awareness and New Human Capital/ Talent.

    Level 5 - Banking (Debt)

    Debt is often the cheapest form of financing but it is often tough to come by due to the lack of palate for risk. Debt can come in the form of Convertible Debt, Business Loans, Senior Debt and other myriad forms.

    • Product or Service is Well Developed
    • Established Client Base
    • Strong Revenue Model
    • Large Growth Potential
    • Strong Profits
    • Available Collateral or Personal guarantees
    • Use of proceeds is for further Product/Service Development, Marketing, Large Scale Awareness and New Human Capital/ Talent.
Step 3: Get Prepared

    The 10 P's Of Preperation

    1. Pontificate
    2. People (The Team)
    3. Problem Statement (Why?)
    4. Product (Idea)
    5. Potential (Market)
    6. Protection (Competition, IP)
    7. Promotion (Marketing)
    8. Pricing (Cost of Product/ Service and Budgets)
    9. Profit (Revenue Model and Margins)
    10. Payoff (ROI and Exit Plan)
Step 4: Create A Pitch
    1. What is the Process?
    2. What do I need?
    3. Common Mistakes
    4. The Elevator
    5. Three B’s (Brief, Brilliant, Be Gone)
    6. The Rule of 12
Step 5: Present To Investors
    • The List
      • Segmentation and Pipeline
    • The Impression (online and In Person)
      • Relationship Momentum
    • The Follow Up
      • Professionalism
    • Due Diligence
      • Be Prepared and Be Honest

    Back To ISU

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