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.