Articles for November 2010

Tips to get seed funding and support 6/6 – Technology and Goals

To complete our application but also in order to generally have an as well-rounded a submission as possible for any purpose (in other words the beginnings of a business plan) you need to address a few other issues too.

Technology

It’s important to demonstrate how you plan to implement what you’re suggesting and of course that you have the capability to deliver. Although the latter is partly covered in the members’ profile section, it’s a great opportunity to show off your experience when talking about what technology you plan to use.

Overall, we are interested to get a better idea about your grasp of the technology and how you plan to use it. It’s not necessary to go into full detail about the implementation – just make sure to mention your backend and database choices, any frameworks you plan to use, collaboration software you’re familiar with and so on. If there are any particular reasons to make certain choices (other than your experience in it) make sure to mention them too – we like to know we’re dealing with knowledgeable and opinionated founders.

Needless to say, as long as the technology makes sense we have no bias towards particular platforms or solutions nor will we require you to use something you’re against. At the same time, there is no need to select the most state-of-the-art architecture and the latest version out there. As long as you can get the task done, that’s what matters – you can even choose from ready-made solutions if that’s more efficient (nobody expects you to write your own blog engine). You can expect however to be exposed to new services and ways of doing things as part of our mentoring process.

As mentioned, it’s important to let us know how proficient you’re with the tools you plan to use. Man-months spent is a first measure but nothing speaks better than your previous works – and how exactly you participated in them. It’s also key to let us know who will be the chief technician who will bear the main responsibility of getting the job done and who will be there to support him or her (if any).

Goals

It’s crucial to have definite and ambitious yet achievable goals in mind for a predefined period of time when starting a project. That gives you something tangible to work towards and going through the process of outlining your targets forces you to make a reality check on your project.

Definite goals means something you can measure or quantify. Examples include number of users, non-paying customers, user conversion or retention, even revenue if you think you can make it that far within the incubation period. It can be (actually, it should at least be) having implemented an alpha or a beta version of your product, with specific features tested and launched. It can include having researched the market to understand associated costs and competition parameters, then digest this information to iterate on your priorities and strategy. It can include having secured a number of enterprise deals. Basically, as long as you have some structure and actual numbers to avoid vagueness you should be fine.

Of course, the suggested goals should be within reach given the time you allocate to them. It’s probably not believable if you claim global expansion within a few months time and you can’t probably get thousands of active users in a similar duration. Be realistic and try to connect your estimates with the actual tasks you plan to undertake, previous similar work you’ve done or at least similar projects carried through by others. It’s also wrong to set your goals too low – playing it safe will probably cause inadequate results – better to err on the side of excess. And as usual if the task of setting goals seems daunting it’s useful to categorise them into short, mid and long term goals.

To sum up

This post completes our short guide at submitting a successful proposal in a seed funding vehicle – based on the Openfund application form. Although there are a number of similar articles online on the issues covered we believe that by going through our suggestions you can significantly improve the quality of your submissions. We are looking forward to them!

Tips to get seed funding and support 5/6 – Funding

Another very important aspect of your application in any seed funding vehicle like Openfund is how you plan to handle the money issue. This involves how much you expect to spend to reach your targets, how you plan to use the money requested if successful and what your burn rate will be over time.

One of the common mistakes we see in the applications we receive is startups claiming they need an order of magnitude more than we can give – which – simply put – is a waste of everyone’s time. However, if you have done some work projecting all your revenue and expenses for the next few years and expect to need up to 50K in the first few months and the rest over time, then we’d like to hear about it. In other words, if you can get a working pilot of your business for up to 50K, then it’s ok to perhaps mention larger numbers – for information and context purposes only though.

On the other hand, requesting something closer to the lower end of our range – even though you might be eligible for more given the number of people in your team and provided the money is enough for what you’re planning – might be a good way to make your application attractive to us in yet another way. This of course works best when combined with solidly supported expected expenses and profits in your plan. In other words, do not ask based on what is offerred, but instead try to estimate how far on your big plan the Openfund push can get you and describe your path on how to get there.

A common question we get is whether the budgeting should include pay for the founders. The answer is yes, and it’s why we insist that team members are required to focus full-time on their project. Since they will have some income from the seed funding it should be possible to give everything to their effort. But remember that when it comes down to allocating expenses, the startup’s viability should be an almost as important concern as your own. In other words, you should probably not expect to earn as much as if you were employed – or indeed as much as you consider you’re worthy of; after all you’re investing your time in your own company.

Other than that, the more detail you include in your planning, the better. Be sure to cover expenses such as unusual hardware required, software and other licenses, patent costs and anything relevant to your startup in particular. Allocate some funds for you and a separate amount for marketing and promotion. Be sure to break down the latter per actions that you plan to take. Also make sure to allow for some unexpected expenses. The Openfund may be able to provide you with studies and surveys to make informed business decisions but – depending on the nature of your proposal – you should also allocate some funds for that purpose too, if necessary. Finally, you should also keep in mind that there is a small associated legal- and accounting- related cost for setting up and running the company, yet we have done our fair share of research to keep this at the bare minimum.

Avoid allocating too much to outsourcing expenses and certainly do so only for non-crucial but still necessary needs. Keep in mind that you should keep your most vital and innovation-heavy activities in house, we do not consider subcontracting houses as selectable start-ups after all. Travelling budgets should also be kept at a minimum unless there are particularly good targets (conferences, trade shows etc) that are uniquely good opportunities for your business which are being planned in the next few months (a sign of good organising actually). If an office and common hardware and software are required, the Openfund can probably help, particularly for startups based in Greece, but we can possibly deliver for applicants abroad too.

In general, it is a good idea to justify costs and to explain both why they are necessary and to why they are as you claim (e.g. by quoting offers, linking to example prices etc). In any case, dropping numbers on their own and with no justification isn’t helping. If you think, this entire exercise is complicated, it is a good idea to try breaking it down by time periods (months, weeks, etc). In any case, it’s something that needs to be done sooner than later and the more you understand your business in advance the better. Obviously, however, you don’t need to put all those details in the initial application though, you’d rather just summarize the basic numbers and keep the exact breakdown per month for the full business plan which will be requested from you in the next stage.

Finally, you should be able to make an estimate of what your burn rate will be at the end of the ‘incubation’ period by assuming things went according to the plan – or a bit worse. That’s essentially the amount you need to spend per period of time for your company to keep working – regardless of whether it will have started generating revenue. It’s important to have such an estimate in order to understand what the margin of error is if something goes wrong as well as how quickly further funding will need to be found. Obviously, the burn rate should be as low as viably possible and broken down per expense to justify the figure.

Getting the numbers right is not a trivial task for a startup and that’s a good reason to start attacking the problem as early as possible. One may even argue that there are no ‘right’ numbers; however, in any case, it is of essence for your endeavor to do the math and have a plan with a basic estimate of your required budget and it’s breakdown. There’s a lot of help, guides and blog posts out there with useful advice so you should at least be able to put something basic together to begin with. And once you made some progress you can revisit it and improve upon it.

Next week, we’ll wrap up this series of posts by offering hopefully helpful advice on items not covered elsewhere like goals and technology. Also, if you have any questions regarding the application process, feel free to share them in the comments or in our contact form.

Tips to get seed funding and support 4/6 – Competition

Another important aspect of your proposal and, if all goes well your business, is your competition. And although in practice there’s very little you can do about it if you’re just starting up, you can still use it while planning to better understand and position your product.

We’ve found that a significant portion of startups applying for funding and support rush to say there isn’t any competition to their very innovative idea. Be conscious of saying that as it’s very unlikely: your idea (at least with some modifications) has been in all likelihood tried before – you need to find those other attempts even if just to learn from them. If you look for it thoroughly and there is indeed no competition, that’s not necessarily good news: it might be an indication that perhaps your idea is not that necessary or technically or financially feasible. In this case, you should re-examine its basic premises, perhaps run it against some of your friends of a target group similar to what you’re after. That can only be helpful after all.

If you do find there is some competition, even indirect, at least some basic facts about it should be collected and documented briefly. What’s their core offering, their main revenue streams, the demographic they target, the size of their market. We understand it’s hard to find such information and especially quantify it but it’s important that you start familiriasing yourself with the process and the industry. At the very least, you can use some slightly outdated reports or estimates for numbers you can’t find. The best course of action is to be as honest and thorough as possible. At the very least find out about the major direct competition and the most relevant indirect competitors. Try to draw some practical insights from their business – which soon you will hopefully be sharing.

Having gone through researching the competition the most likely and actually useful outcome is to outline a business opportunity based on it, the so called carving out of a niche. This is important as it allows you to aim for a specific place in the market which is relatively safe. In other words, you will be offering something that is both needed by the market and at the same time not given by other businesses in it. For example, you can offer to do something really well for a particular vertical when so far only generic solutions exist. Or you could offer a solution for small or one-man companies when only for medium- and large-sized ones exist. Or you could try a different combination of features – the possibilities are unlimited.

It’s also a good idea to show if there are any future competitors that might emerge in the near future. If for example, Google or Facebook can (and has shown indication) that with a relatively small effort they can implement your entire startup as a feature of an existing product of theirs, it’s a good idea to address such a prospect. Either aim to become a good target of acquisition (and be able to support it) or have an other exit strategy if that occurs (e.g. have an alternative business model).

Finally, this is the section to show off your unfair advantage against your competitors. That can be the first mover status, but that’s not that important in online startups (which can be – and are – copied rapidly once a good idea is found). Experience in the industry by the team members is something significant and probably what you can count on the most. Tools an algorithms you have developed that work magic may also be important to differentiate yourselves. So-called killer domains are also something but again not anything to rely upon (as most unintuitive domains of successful businesses can prove).

A significant advantage is that of intellectual property. Although startups may find it hard to go through the process of protecting their IP, if they have something that can be protected, it’s a strong card in their hand – and support companies like the Openfund can help them make the most of it. In other words, it’s a separate asset from their product and their business as a whole: if the latter doesn’t do that well they still have leverage (and value) just by holding on to their IP. As such, if there is IP protection (or is required) that should be mentioned. On the other hand, if there are IP-related issues pending they should be disclosed as these are very sensitive and any reviewer will question them.

That’s about it regarding competition although at the end of the day that’s just another thing of the many that should be factored in your startup. Overall, it’s more important to focus on results achieved and work to be done in your turf instead of worrying too much about the neighbor.

The next post covers some aspects of the financials of your startup – i.e. how you plan to spend the support earned.