It is, however, vital for entrepreneurs to understand that external financing is not usually a necessity in the early stages of a startup, and that in some cases it can severely hinder its growth.
In the initial stages of your startup, you will need to focus mostly on your feature product or service, and investing your existing finances, time, and resources into its refinement—this is what will ultimately attract investor attention—instead of trying to identify your next source of funding.
External funding will also present its own challenges and associated risks. As an entrepreneur you can shield yourself from a great degree of such risk and save a lot of money, time, resources, and heartache if you follow a structured plan to get your startup off the ground.
While there is no step-by-step guide for entrepreneurs to follow, you can benefit from taking note of the following process.
Validate your idea
Startups spring from ideas that seem convincing to entrepreneurs. Such ideas or propositions can be based on varying levels of prior experience, knowledge, or understanding. As an entrepreneur you should seek to validate (i.e. verify) your business idea before seriously beginning work on your startup or making any commitments, especially those that are financial. This can be done through simple but thorough market research on the internet as well as receiving input from your network and/or other players in the market. You should seek to conduct interviews and discussions with knowledgeable market players (thought leaders, established businesses, future competitors, etc.) and potential customers, in order to gauge your idea’s market potential before you begin working on it.
Evaluate your chances
- Your idea can eventually become a viable, thriving business. Before it does, however, you need to ensure it has enough potential to generate sufficient revenues and can survive the ups and downs of the market before investing your time and other people’s money. Larger and more powerful competitors can deploy a product or service similar to yours more quickly, at a much cheaper rate, and to a greater number of customers. You need to evaluate the chances of this happening and the risks they pose to your idea or business.
- It is recommended that you analyze your competitors (other businesses and organizations that may provide similar products or services) in the market to better understand what the competition offers and what it doesn’t, and how your startup can either fill gaps or deploy better products and services.
Asses the requirements
- If you determine that there is indeed potential for your product or service in the market, you will need to thoroughly assess the requirements to turn your idea into a business, financial and otherwise. Before investing time, money, and resources, you will need to have rough answers to the following questions:
- How much financing will I require to turn my idea into a business, including developing a prototype of my product or service? Do I have enough money to bootstrap? If not, from where will I be able to obtain financing?
- Can I, at least initially, work on my idea part-time, or will I need to quit my job and work full-time?
- What are my targets, and how soon should I reach them before abandoning the process?
- Will I need a co-founder or team, or can I run the startup on my own, at least in the beginning?
- What are the legal issues I need to watch out for, including those related to business registration or licensing?
Operationalize your idea
If you determine that you do indeed have the necessary ingredients to take your idea to market, you can begin to turn your idea into reality.
Find a suitable accelerator or incubator
At this stage, you would benefit from the support and guidance to turn your idea into a real product or service. You should consider whether you would benefit from enrolling in an accelerator or incubator1. They can support you in developing your idea into something tangible, provide you with dedicated and relevant expertise, and direct you to financing opportunities, in addition to other types of support. You should do your research on such entities before applying, in order to determine their added value for your specific startup.
Establish a Minimum Viable Product (MVP)
In order to test your idea, you will need to establish a prototype, or Minimum Viable Product (MVP). An MVP is a basic product that allows you to generate initial feedback from customers and assess whether your idea works as you imagine. Creating an MVP should present a minimal expense, and should be quickly adaptable depending on the requirements of the market. In addition to enabling you to understand the needs of your clients, an MVP can help you demonstrate to investors and relevant stakeholders that you have a product that can generate sufficient traction and be the basis for a successful business.
Generate a user base
You will need to expand your number of clients in order to begin to generate much-needed revenue and further illustrate growth to investors. The greater the number of users your startup has, the greater the revenue and the more valuable the insights they provide on your product. Additional users will be able to inform you on your most vital metrics, including whether or not your customers buy from you again (retention rate), if you sell other products or services to them (cross-selling), and if you persuade your customers to buy something additional or more expensive (upselling). Other customer feedback, including complaints and recommendations, will also provide you with valuable insight. Such information is vital for investors and funders to help them assess the viability of your business and its anticipated growth trajectory.
Once you are convinced you have a viable business and it is growing, you will likely need to secure external funding to continue your growth. If at this stage you do not have the sufficient level of capital required (and most entrepreneurs will not), you will need to have a very clear idea of how much you need to fundraise and for what.