So my partner and I are currently starting up a new tech company but do not have enough net-worth to fund our MVP. I know the most common way to raise pre-seed money is the 3F's however we do not come from wealthy families that even have enough to invest in our company. I am wondering if anyone else in the CoFounders Lab network has any experience with raising pre-seed money and if you have any suggestions.
Our MVP will need to be an application and starting a kickstarter would be difficult (not impossible) because we will not be able to give incentives for backing like you normally would with a physical product.
Any suggestions or tips from personal experience is greatly appreciated. Thanks!
If it's an app then create it's UI/UX design which will cost you no money but give you and your investors a headstart on how the app will look like. Also the only way the investors will fund you like this is to create something unique and marketable which will bring a lot of people to your app. After the UI/UX design process create a proper roadmap on how you gonna take things forward from there. With this process investors won't fund you a lot of money but enough to get you in business but note this - only very few investors will provide you with pre seed money so narrow down the name of those investors and go for them.
Yes, you should mock out your app, build-out a strong business plan and financial model that supports a future investor stream (if needed), and set a roadmap for development. Once you have the economic parameters outlined, then you can better justify the amount of external financing required at each stage.
I have seen too many people dive in on a business idea without adequate planning, then get into an agreement with an outside development team to build their MVP - sometimes with a mix of cash and equity. They later realized that they drastically overspent for this key validation element.
Coming more from the financial side, at this stage, I suggest doing everything you can to bootstrap your MVP. The more you can cover on your own at this stage, the better off you will be when it comes to seeking outside capital. Unless you have something completely revolutionary, the road to equity at early-stage will be tough and very dilutive. Plus, any outside investor wants to see a sizable amount of skin in the game by founders.
What I have seen work at this stage: (1) bring in freelance developers with a mix of deferred payment and stock options, (2) get a side gig to supplement your income and dedicate towards the business, (3) eventually seek out angels that have a passion for your space/product and offer up convertible debt / SAFE with discounts and/or valuation caps.
The common denominator in my book is to maintain as much control as you can with the development process and the financing of your business. Is it incredibly hard to go this route - YES, but there ARE other paths than the default "I immediately need to raise equity."
Take a look at a Regulation CF Equity crowdfunding. You can raise a little from small investors, then use that money to raise more. Take a look at:
This way you can give plenty of interesting incentives, including equity and also revenue participation.
I am in a similar position as you are and what I have done so far is to make sure that I have a solid Business Plan, Pitch Deck, 5 year Financial Projections, capitalization Table and a Prototype of my user mobile app via https://www.invisionapp.com
In Vision allows you for free to create a prototype using screen shots of your app pages and also allows you to create links so that one can navigate through the app as if it were already developed.
Next step would be to create a Pitch via an Equity Crowdfunding Platform where you can of equity as the incentive.
I am in the same situation as you and I have found a few solutions.
1) You can hire a student UX UI designer (or just graphic designer) who can build a clickable prototype using Sketch or another software. This will give you something to show potential investors.
2) Apply for all the grants, startup contests that you can! It's easy and if your idea is good you can raise a lot of money that way.
3) Do a kickstarter and try to find creative incentives! There are a lot of articles with good ideas out there, you just gotta find out what works for your startup.
Good luck :-)
I am in same position. Thank you for asking on behalf of me.
This is a common challenge for startups. Lack of cash is regularly why businesses either fail or choose not to start. And choosing not to start is better than failing and losing the money you put in but didn't get to finish. That's entirely why business plans are written. The planning stage is when you determine if your idea is a business or just an idea. Not all ideas can become businesses.
Every entrepreneur should have a plan that looks at what to do if you receive no outside funds at all. If you can build your business that way, do it. Most businesses will NEVER receive outside funding. The amount that you determine you would need tells you how unlikely you are to receive outside funding or from which sources. I wouldn't assume that the people here even know what the 3 F's are.
Can you revise your plan so there is a fraction of your idea that costs less but will make some money? If you could only do parts of your idea that make money right away, what would the business look like at the start, and how would you evolve and grow in a self-funded format, into what you originally imagined?
Crowdfunding does not work for most people. Fundraising does not work for most people. And sometimes knowing that you cannot start your business because you don't have access to sufficient resources is exactly the information you need so you don't lose the little you have. Not starting is not a failure. Not starting is smart when you know you can't succeed.
Instead, work on your plan so you can either figure out how to tweak your product so it doesn't need outside money. Or compose ways that you can do things unrelated to your new idea that will help you accumulate money you can use towards it. Get a second job, start a different smaller business for a while, etc.
Most entrepreneurs I have met don't have only one idea. They have a favorite idea. We'd all like to work on our favorite idea, but often end up working on number 2, 3, or 4 because we simply lack resources to execute our favorite. That's not failure, that's managing risk.
I have launched 4 companies in my history, the fourth being my favorite. The first three built up enough resources for me to start the 4th, but I knew going in I was underfunded and had a high risk of needing to stop because I wouldn't have enough funds to continue. It would be a calculated risk, being fully aware that I could lose $250K with nothing to show for it if I didn't find another $800K while I was building the foundation. It's very hard to fight the sense of urgency you have with something you love. Be strong, be smart, and don't lose your shirt because you're waiting for money that doesn't come.