Some things about money
For physical product startups anyway.
I’ve been talking to people about money. Well more specifically about investments and valuation but really the topic was money.
There were terms such as seed funding, SEIS and EIS, burn rates, traction, validation, cash but mostly the topic was money. Where to find it and how to get it. So I thought I would jot down some thoughts in one place. As a caveat all my conversations were with physical products, some of them are hardware.
How do I get investment?
Well, if you can obtain some grant funding to (part) pay for your development you should apply. In the UK InnovateUK is a good place to start, and there are other specialist sources of finance so keep your eyes open. Other types of sources, such as your savings, loans from friends and relatives and competitions can also help.
If you do look for investment you should know roughly how much money you will need for the next three years, based all pessimistic development timescales and pessimistic income. It is not that you will be asking for all of this money at once, just that you will need to be aware of when you will be needing money in the future and the rough size and shape of it. I know that future figures are mostly guess work, but see Guess, Guesstimate, Estimate, Cash for more details.
The more money you need, in general, the longer it will take to find and secure it. This may mean that you are looking for senior/VC funding whilst you are still creating and selling your first products. Know this and plan ahead. Try to avoid always looking for money, so that you can get on and create a proposition that is essential and compelling for your customers. That’s where the runway buzzword comes into play.
The degree of certainty of the money requirement depends on your stage of development: both of the products and of the business. The earlier you are, the more certain of the immediate costs will be. If you are paying external companies to develop then get a competitive quote, to ensure that the price is fair.
Different stages of growth, are well…. different
The stage of your business will determine the way that people who have the money will talk about your business and your need for money. You will need to recognise the difference in language and respond accordingly. For example, burn rate and cost of customer acquisition are only relevant once you have a prototype to sell, before then prototyping costs and campaign costs are key.
At each stage, you will require different proof or evidence of your progress. The evidence might be showing that people want your product even before it’s ready (social media followers: Instagram, twitter, facebook) or showing how much Facebook/Instagram advertising budget it took to create a sale. It’s best that you understand this early, collect the information so that you can have the information up your sleeve for the next stage.
It is never too early to collect evidence.
For growth and scaling funding, providing proof that you can sell the product to targeted customers is important. Crowdfunding product sales such as Kickstarter or Indiegogo is one way of providing problem/solution fit, however I say that you must care how you sold your product to your customers and also how much in control you were of who you sold it to, because you can only step on the gas and accelerate sales if you know how you make sales.
Care how you made your sales, so that you can create more of them
What happens if I don’t get the investment I want?
It might be time to call it a day.
Or it might be time to reduce expenditure and produce more compelling evidence for your problem/solution fit or product/market fit. Look again at what is essential. Is it possible to 3D print the plastics/body for the first products to save on the initial tooling costs? Yes, I know that 3D printing is more expensive, but for limited volumes to show that there is customer demand it may be worth it.
Remember also that it is possible to get sales for a product that is still in prototype. You will need to build the buyer’s trust in you and your product, probably by listening intently to their concerns and knowledge about their customer base. There will also be hoops and hurdles to go through before a decision to purchase x000 units becomes a piece of paper with an order number on it. BUT IT IS POSSIBLE.
And finally what’s in it for me?
All people who give access to money will want to know why they should grant you access to that money and what they can expect in return. For most money trees the latter will be in the form of cash whether that is interest on a loan or all share sale proceeds but sometimes backers might also want to be associated with your company such as a seat on the board or a T-shirt.
And here is a summary of the type of places physical product startup companies typically find cash.
Idea Stage
Your savings are the main source, friends and family, pre-accelerator support.
Prototype stage
You, friends and family, incubators, accelerators, angel investors, also grants and product sale crowdfunding such as Kickstarter and Indiegogo
Selling more than 100 products
Friends and family, angels, accelerators, incubators, SEIS/EIMS funds, equity crowdfunding also supply chain finance and other commercial products
Scaling and growth
Angels, funds, institutions, equity crowdfunding
What are the important sources that I’ve left out?
Let me know in the comments below or lets chat, my diary is here.
