How to use your MVP to raise seed funding
You've got your MVP, traction, and revenue. Where can you look to raise funding for growth?
I really liked this question that came through Quora recently:
My company has a MVP, traction, and revenue. We are seeking $40k in funding. Where do I begin looking?
It’s a great question because it highlights something that founders commonly miss about the MVP: it has to be viable.
“Viable” is the most important word in the phrase “Minimum Viable Product”. In order for your MVP to work it has to be viable. It has to deliver value to the customer. In other words, it has to be worth paying for. And it has to create value to you—it has to make you money. If it doesn’t do both of those things then it’s not viable.
Unless you have a bottomless source of VC funding, building revenue is not optional, which is why I liked this question. If you’re a bootstrapped founder, your goal is to get to profitability as quickly as possible.
Back to the question: how to raise $40,000?
What are your options? Barring some really creative financing ideas (such as minting your own cryptocurrency), you basically have four options:
- Borrow from the bank
- Borrow from friends and family
- Find an angel investor
- Raise the money from your customers
Borrow from the bank
I almost always advise not borrowing money. Borrowing money is always risky. Don’t take this the wrong way, but just by virtue of being a startup founder, you automatically have a very small probability of success. But here’s the thing about borrowed money: it’s expensive. When you beat the odds and succeed, you’re going to have to pay back that money, plus interest. From a financing point of view, borrowing is the riskiest investment because there is a 100% chance of it costing you more than the loan value.
If, heaven forbid, you don’t succeed, you still have to pay back the loan. That’s because all small business loans are personally guaranteed—that means you personally have to sign for it that you’ll pay it back even if the business fails. So that’s another layer of risk that you want to avoid.
Borrow from friends and family
Believe it or not, this is actually more risky than borrowing from the bank. The reason is this: if you ever have a dispute over the loan, you can walk out of the bank, but any dispute with friends and family literally comes home with you. While you can shake your fist at the bank, at the end of the day you don’t have to face them for the rest of your life. Thanksgiving dinner will taste very different.
Find an angel investor
Finding an angel investor can be a good choice. You do want to find the right angel investor. You’re looking for someone who shares your values and vision for the company, who has realistic expectations about your business and return on their investment, and who is not going to push you to cede control over the business. Partnering with the wrong investor can be a big mistake, but finding a good one can open up a lot of possibilities.
Raise money from your customers
Nothing beats raising financing from your customers.
Raising money from your customers validates that they love your product, they get something of value, and you never have to pay it back.
Nothing beats raising financing from your customers.
But what exactly do I mean by “raising money” from customers? If customers are already paying for the product, won’t this annoy them?
Not if you approach it the right way.
Be frank with your customers: tell why you’re raising the cash and why you’re coming to them first. Cast your vision for your company and let them get excited about being a part of your company’s growth.
Here are some ideas for ways that you could pitch your fundraising campaign to your customers:
- Offer your early adopters a special discount in exchange for prepayment.
- Offer people who are currently in a free trial or on your freemium plan a discount for signing up now?
- Do a kickstarter-style campaign: offer early adopters lifetime access for a prepayment.
- Offer existing customers a discount in exchange for going to an annual plan.
How many customers would you need in order to raise $40,000?
- 40 customers at $1000
- 400 customers at $100
- 4000 customers at $10
Or flip the math:
- 10 customers at $4000
- 100 customers at $400
- 1000 customers at $40
The math is pretty easy: Could you find 100 customers to pay you $400 for your product? I bet you could.
We used this technique at Donor Tools. Donor Tools was completely bootstrapped: we had no outside investors and took no loans. After we launched and had paying customers we offered a special deal that we called “Donor Tools for Good”. For $2500 up front you’d get lifetime access for as long as Donor Tools existed. We got ten customers to upgrade and raised $25,000.
If you’re not able to pull off a deal like this, maybe you need to step back and take some time to understand why. Is it because your product is truly not valuable enough, and customers aren’t willing to pay that much? Or could it be that your messaging isn’t conveying the value? Could it be an issue with confidence? Are you really confident in your product and its value? You should be: it solves a real problem for people and it’s only going to get better. Let that confidence show through with you talk to customers.
At the end of the day there’s no better place to look for funding than in the marketplace: your own customers. They like you enough to pay you, they believe in your product, and you have their attention. Leverage that trust and attention to make your product better and grow your business.