How to Raise Funds for Your Own Startup

Considering starting a company of your own to build the next great software product or service? You just have to do your homework and then find a way to fund your venture.
Posted February 16, 2006

Eric Spiegel

Eric Spiegel

Don’t quit your day job! This phrase has been heard by countless would-be entrepreneurs. If you are considering starting a company of your own to build the next great software product or service, don’t let the naysayers dissuade you. You just have to do your homework and then find a way to fund your venture.

I’m going to assume you have already done the basics, such as patent and Google searches, vetted ideas with potential customers or partners, and found some key people who are just as excited as you about this opportunity and capable of supporting your efforts.

Before jumping ship and raising your first dollar, you need to consider a few things. First and foremost, your financial position will determine just how far you can go without initial funding. Be prepared to self-fund your venture for at least six months. If you need a home equity line to do this, obtain it before you leave your job, otherwise you may not qualify with the loss of income.

The other important consideration is how hard it would be to find a job again with your skill set and a potential resume gap. If you have to find another job after a year, many hiring managers will question your commitment to a regular job. Depending on how hot your skills are, it may take some time to find employment again. Therefore, the more cash you have on hand, the less risk you have in taking this leap.

So let’s say you have the financial wherewithal and your research has proven there is a market for your product or service. Time to resign and start fund-raising. You will have a much better shot at raising initial funding if at least one person is full time in the business because it shows you have enough conviction that your idea will make money to take this risk.

We need to do some level setting of expectations regarding raising capital. The days of business plans on napkins resulting in million-dollar checks are over. If this is your first startup, you will have to raise your initial or “seed” funding from a source other than a venture capital firm. But no need to get discouraged. I’m going to review five steps that will put you in the best position to raise the money you need for getting your venture off the ground.

1. Build a plan.

But not a full-length business plan. In my quest to raise our first round of funding, no one asked for the entire plan. Start with a one-page executive summary of your business plan. If you haven’t done this before, find someone experienced to help you. Investors expect it to be in a certain format and you need to include basics like business description, market need, sales strategy and projected financials. (Email me if you would like a template.)

2. Network with service providers.

Lawyers, bankers and auditors are the best place to start. Find ones that are very experienced in tech startups and are well-connected to VCs. Let them take you to lunch and use that opportunity to quiz them. They will help you with your pitch and make introductions. Their expectation is that you will use their services once you have the funds. We worked with Cooley Godward, a law firm well known in tech circles, who made numerous introductions for us.

But do stay clear of venture brokers for the seed round. It’s doubtful that they could help you this early and investors frown on paying a commission regardless of the round of financing.

3. Investigate university advisory programs.

There are many organizations that provide assistance to startups -- you just have to know where to look. Check out your local universities online and see if they have an advisory program, whether you are an alumni or not. The Dingman Center for Entrepreneurship at the University of Maryland provided us with guidance on our business plan and made several positive introductions as well. Their services include everything from hosting angel networking events to allowing us to use their conference rooms for meetings.

4. Join a technology council.

Another avenue for advisory services and networking are local technology councils. Joining these organizations only costs a few hundred dollars and some even have specific services for tech entrepreneurs. These groups are usually what you make of it; you have to participate in committees and attend the events. In doing so, you are building up your referrals and potential advisors. We joined the Greater Baltimore Technology Council, which has provided us with networking for sales, partners and venture contacts. You can also consider technology incubators, but you will have to pay the rent. This option might make more sense after you receive the first round of venture capital or have revenue.

5. Present your plan in a public forum.

There are many annual events that provide a venue for business-plan competitions and venture-related forums. We applied and were selected for our local MIT Enterprise Forum to present our business plan to a public audience and panel of VCs and local successful entrepreneurs. As it turned out, a partner we had been courting for months had their CEO on the panel. Just goes to show that presenting at an event like this can have unexpected positive results.

You now know how to lay the foundation to raise funding. The next steps are to be aggressive in closing your seed round. You may find state or local agencies that have venture programs. Depending on how tech-friendly your locale is, there may be programs, including funding, that can provide you the boost you need. We were approved for the Challenge Investment Program from the Maryland Venture Fund that required we find a match to receive the funding. It took us a few months to eventually find the match, but by getting approval, it opened up more doors for us. This state funding program provided us with someone in our corner with skin in the game, which resulted in a very credible reference.

To find the match or your entire funding amount, your best odds are friends and family who are willing to invest or a strategic partner who might also benefit from your success. In our case, we secured funding from a strategic partner who also happened to be our offshore product development partner. Angels are possible, but hard to find unless you know someone in the industry you are targeting who not only “gets” what you are doing, but can provide customers and partner referrals, such as helping you land your first beta customer.

Once you have all of the above, then you are well-positioned for future institutional funding because you will have a solid foundation to build from, including a successful seed round. VCs love to see that others believed enough in your idea to put their neck on the line.

Finally, there is one basic I neglected to mention. If you are married, it is wise to get spousal approval first. Being an entrepreneur adds stress to any relationship with a significant other. If you can show not only a passion for your idea, but a well-laid-out plan for raising funding, it will be a much smoother approval – and start you down a more proven road to a successful startup.

So go ahead, quit your day job with confidence and good luck pursuing your dream. All of us fellow entrepreneurs will be cheering you on.

0 Comments (click to add your comment)
Comment and Contribute


(Maximum characters: 1200). You have characters left.