The Maker's Manual: A Practical Guide to the New Industrial Revolution 1st Edition (2015)
Part II. Realizing an Idea
Chapter 8. Financing Your Work
In Chapter 7, we said that an enterprise needs key resources, activities, and collaborations. This all comes at a cost and, if the maker wants to turn into an entrepreneur, she must understand how to face that.
Classic funding sources
Two traditional financing sources are:
§ asking friends and relatives;
§ asking a bank.
Let’s look in detail at these.
The friends and family network
Many small entrepreneurs start like this, investing their savings and, for any remaining needed funds, asking parents, relatives, and lifelong friends.
It is often fairly easy to convince them: they are people who have seen us grow up, they love us and want us to be successful. They are already set to believe in what we believe in, they get carried away by our enthusiasm and are going to share our vision. Typically, they won’t even ask for interest and in some cases they won’t even want their money back.
If our start-up turns into a proper sustainable business, that is great. If things go bad, chances are we’ll drag down people who believed in us. In these cases, the issue goes beyond the economic factor: even the most strongly established relationship can become strained when money is lost, leaving the entrepreneur alone in a hard moment, without any moral support.
Another solution is to go to a bank and ask for a loan. In nearly every case the bank will ask for some form of collateral to secure the loan, for which you might end up asking your family for help. In this case, the list of people who can help gets smaller, because a friend who is ready to lend you a few thousand dollars would hardly accept a mortgage on his house for the sake of helping you.
The financial aid that banks offer start-ups is usually relatively small; the same can’t be said of the interest. It is usually compound interest, so asking a bank for money is a rather expensive solution.
Also, you’ll have to work hard to convince the bank’s executives not only of the validity of your idea, but also of your ability to make it real. (Actually, this last point is vital regardless of the source you will choose for funding.)
There are many other funds you can access; let’s have a look at some, starting from the most established ones and moving towards the new possibilities offered by the Internet and on virtual communities.
Local and Regional Economic Development
Many states and regions in the US have Economic Development Corporations. These are usually either non-profits or quasi-governmental agencies that can provide guidance, and in some cases early stage funding, for startups. Some states and regions may have specialized programs for funding technology startups. For example, the state of Rhode Island’s state-funded Slater Technology Fund provides seed financing to promising startups and helps them make connections with other investors.
The New Angels
Angel investors are often retired company managers or entrepreneurs, with money available, wishing to invest in a young enterprise rather than in traditional financial instruments.
These angels usually come into play at the early stages of a company, driven by the challenge and by the desire to be part of something new and rewarding from a personal point of view. Beside providing finances, angels give the project more credibility, and put their own contact network at the founders’ disposal. They’re also great sources of advice, leading the new entrepreneurs along the difficult path they are going to face.
Of course the economic aspect can’t be overlooked, because angel investors usually expect a significant capital return. This rate is justified by the risk connected to the project, which for technological start-ups is often linked to non-tangible and hardly quantifiable aspects. Because the typical angel is not particularly interested in the ordinary management of a company, but is much more attracted by new challenges, the economic return is usually achieved by selling capital shares, which the angel buys out against the investment.
Achieving funding by an angel investor is in some aspects easier than with banks and finance agencies, because the relationship established between founder and angel is very straightforward, based on mutual trust and sharing of values and visions. Therefore, the time needed to obtain funding is rather short, typically within months after the first meetings.
Similar to an angel investor is the venture capitalist (VC), an investor who is willing to put at disposal a high risk capital, coming from funds that they manage, financing start-ups expecting a very high return, which usually operate in technological and innovative fields. (Google is a perfect example of a venture capital success story.) Venture capitalists don’t address the same market as the formal investors; they aim to companies with highly scalable businesses and returns of a bigger magnitude than the investments.
With a venture capitalist on board, there’s a very high risk that the entrepreneur can losing the management of their own company. VCs usually invest millions of dollars, and investors tend to not leave the running of companies to inexperienced people. The VCs’ main goal is not about having contributed to the launch of a new enterprise, as it may be for the angel investor. Rather, venture capitalists are all about recovering their investment quickly, with the only aim of raising the sell-out price of their own company shares in the short term.
Figure 8-1. Components from KippKitts, Arduino, and Maker Shed await eager hackathon participants in Providence, RI
A recent phenomenon made possible by the Internet is crowdfunding, literally financing by the masses. This process allows an entrepreneur to present their own project on specialized websites, asking the community for financial support. The community might be made up of people who are interested in participating in the project development, potential clients, or just supporters.
This kind of funding has many advantages. First and most important, in order to launch a project, an entrepreneur must raise a certain amount of money by a certain deadline. If the money doesn’t arrive by the deadline, you have a good indicator that your idea could be hardly as wonderful and revolutionary as you thought. There is nothing more wasteful then using resources (particularly time) to devote yourself to an activity that won’t bear any fruit. So, if your ideas are rejected, try to understand how you can improve your offering and celebrate not having wasted your time.
Another advantage is that the founders keep full rights to the project, because is not financed but sponsored: no one who donates to a crowdfunding campaign expects a financial return, or intends to take over the company. They are typically expecting to receive a product (or some keepsake related to the product).
There are several possible levels of involvement in a crowdfunding campaign, so it is possible to contribute donations of different amounts connected to more and more substantial rewards: a virtual thank you, a customized t-shirt, a mention on the packaging, access to the early versions, the chance of purchasing at a discounted price, one or more items of the finished product, and more.
The benefit for the sponsor is to have access to the product or service before others, sometimes even participating in its development. This kind of approach by all interested parties fosters the creation of communities around your product, creating a virtuous circle where the client turns into the first promoter of the project: word of mouth is a very important tool here, because it is very effective and costs you nothing. The Internet takes this idea to the extreme, allowing some projects to grow until they become viral, often in a very short time.
In the United States, there are many crowdfunding platforms. The most popular one is Kickstarter, though we musn’t forget others like Indiegogo, FundedByMe or RocketHub.
What if you are not looking for financing? What tools could you use to make your activity flourish and turn it into a profitable business?
For the ones who don’t want or don’t like the risk of taking investment, there is an alternative: creating a business that can support itself starting from zero, or nearly so. The entrepreneur Chris Guillabeau claims it is possible to start a new business spending about a hundred dollars. Again, the Internet comes to help with free or low-cost services: you can use Weebly or WordPress to create a website, MailChimp to manage your newsletters (including A/B testing experiments) and much more. Steve Blank (see “Success, For Real This Time”) maintains a list of these tools.
What’s the Right Solution?
All the forms of financing and tools we have analyzed are not exclusive: they complement each other to provide a service that is tailored to the needs of different realities. We could start an adventure in bootstrapping for our first experiments, use crowdfunding to make a marketable product, ask a business angel for help with the creation of an actual company, and finally scale up with the contribution of venture capitalists. The different opportunities are typical of different stages of a company lifecycle and have to be regarded as such.
Always keep in mind that each enterprise has its own ideal size, depending on the type of product, service and clients and many other factors: growth is not necessarily the only and final answer to all realities.