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Funding is the most critical need of an early stage startup. Without sufficient seed funding, it can’t validate its idea, develop its lead customers, and create a credible proof-of-concept.
The amount of required capital varies depending on the business model and product. And yet, for each startup there comes a moment when your own money and resources are no longer enough to continue moving your venture forward.
The Funding Chasm
As an entrepreneur and a CEO of an early stage tech start-up, I’m facing this issue at this very moment. We are trying to raise a seed investment of $500K, and finding it to be very challenging.
Sramana Mitra, the founder of One Million by One Million(1M/1M),
states that: “Angels and VCs are only interested in businesses with a clear path toward an exit, and those focused on rather large market opportunities. This leaves 99% of the businesses outside the realm of their framework.”
Furthermore, today even angels (let alone VCs) are looking for validated businesses. They have become more experienced and wary of early-stage startups. The statistics of startup successes and failures prove them right.
Thus, in order to raise seed funding of $500,000, an early stage startup needs to achieve adequate validation. Therefore, it needs to raise some pre-seed funding. It may be as little as $50,000 to $100,000. However, that’s where there is a massive gap. It’s a real Catch-22 scenario, and it’s extremely frustrating for entrepreneurs.
That’s what I call the Startup Funding Chasm. But how do you cross that chasm?
Sramana Mitra suggests that Crowdfunding could plug into this gap. The problem is that the “crowd” investors lack the expertise and experience to screen and rate these investment opportunities. There is a need for agencies with the right knowledge and expertise that can provide some sort of a screening and rating system for crowd investors to gauge investment opportunities.
Bridging the Funding Chasm
I personally think that the solution for early stage start-ups like ours, as well as for novice investors should be a hybrid between angels and crowdfunding. Let’s call them a “community of angels”.
Such an agency would have a few experienced angel investors that evaluate, screen and rate the investment opportunities. Those investment opportunities that pass the screening can then be offered to a pre-registered/screened crowd for investment.
This mechanism will help start-ups raise the much needed pre-seed money, in a reasonably fast the simple manner. In addition, it will enable inexperienced private investors to invest modest sums in start-up companies.
Another approach that entrepreneurs can take to bridge this funding chasm is bootstrapping. There are several possible options for this approach. For example, you can find a customer who is willing to fund your product development in exchange for some form of exclusivity. You can offer them a time-based exclusivity, or market-specific exclusivity, or some combination of both.
Alternatively, you might look for customers outside your target market. Customers whose needs are well served by your technology and product. The income you get from such custom projects can be used to fund your own product development and business validation. It can sustain your fledgling company until you raise seed or Series A funding.
In conclusion, the Funding Chasm is real and wide. And, it is currently a major contributor to the premature death of small start-up companies. Developing a scalable solution for it can enable the “other 99%” successful businesses to survive, unleashing tremendous amounts of growth.
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