A key foundation of Capitalism is that capital flows to the potential for highest returns, given the risk involved. We tend to forget this as entrepreneurs, but it should always keep it at the front of our minds as we pitch, especially at the startup phase.
To that end, I’ve provided a list of areas that I hear entrepreneurs want money for, in an attempt to keep high returns at the forefront of our minds.
Startup capital is a myth, and it does not exist outside your own pocket. Starting a business is just one (series of) step(s) in the long list of steps that build real value for the entrepreneur and his/her stakeholders. Anyone can start a company; it takes no special skill or initiative. More importantly, it takes little or no money, and provides zero return on investment on its own accord.
Team Development Capital
Assuming you are the founder, no cash is required. The rest of the team will be brought on as necessary. If you are looking to secure a large startup team, please see above.
Product Development Capital
Product development capital can be a confusing proposition, so let’s spend a bit of time here.
Product development capital is very specific. It is not manufacturing cost. It is not trade receivable financing. It is not cash for market development. It is capital used to determine and develop your minimum viable product. This includes securing reliable market research and analysis, generating expert advice and divergent concept evaluation, and, of course, minimum viable product design and engineering. Each of these areas can cost between $0 and $25,000, but entrepreneurs typically can secure one or two of the three for low or no cost, while concentrating a bulk of the investment on the remaining area(s). If you can keep this investment to under $50,000, you may have a fair shot at raising an angel round.
Requiring more than $50,000, but less than $2 million, in this area alone will be a rocky road.
Some product development, such as in the biotechnology arena, is heavy on the cost of product development with no solid guarantee of return. Some product development, such as technology piggy-backed on an existing platform, requires large up-front costs, with a fairly secure rate of return. Some product development, such as most consumer-driven SaaS development, should require little or no product development capital at all.
Market Development Capital
Market Development Capital is employed specifically to reduce risk. Call it beta, call it testing the market, call it early traction, but it is important to show early success. There are some that believe market development should not cost a dime. They believe that market development should be encumbered by strategic and channel partners, founders sweat equity, and the market itself. Others believe user interaction is critical and costly, requiring both time any money to pursue. Again, if you can keep this investment to under $50,000, you may have a fair shot at raising an angel round.
If there is an opposite of Startup Capital, it would be Growth Capital. All fundraising not specifically addressed in this list is considered growth capital – monies employed to provided more monies, and thus, higher returns. The core idea of growth capital assumes tractions, assumes an operating history, assumes a benchmark to start from and room for expansion. The reason investors invest is for growth. Pitch to this reason early and often. It is your reason d’être.