You have come up with that amazing game changing idea and you are ready to take the risk of quitting your job to focus 100% on following your dream.  Before you do, it is important to understand one thing - Finding money will be difficult!  Early stage businesses are high risk for investors. This is true whether it is your friends or family or professional angels. Put yourself in their shoes.  Your new business has a 2 in 10 chance of success at best. Some will take the risk on the basis that a portfolio of investments may include some real winners.

There are a number of ways to manage this situation. You can stay in your day job and start the new business in the evenings and weekends. For internet businesses the objective might be to build a Minimum Viable Product to test your idea before making a larger commitment. You can also bootstrap. This involves keeping your costs to an absolute minimum.  There are also some small loans and grants available to help you get your business off the ground.  The government has just launched Startup Loans for entrepreneurs who are 24 and under.  This can be seen as an alternative to a student loan and will certainly help get a small business off the ground by funding a website and some marketing.

The objective should be to get to a point where either the business is commercially viable or you have a credible proposition to take to investors. Most now expect to see some kind of prototype. The low cost of technology supports this approach. It is now rarely possible to approach investors with a good idea and a slide show. They expect to see the launch team, a prototype and a degree of traction.

Although many VC’s claim to do early stage investment, it is rarely true.  Bank loans are also a poor choice for businesses that are not revenue generating. This is because servicing the loan is impossible at the early stages. Therefore, it is important to focus on angel investors. Although, it is sometimes possible to access these directly, they often prefer to receive referrals from trusted third parties.  This is because they are generally swamped with requests for funding and find it difficult to see the wood for the trees. Most angel investors have strict investment criteria. These vary widely depending on the individual investor. Some are interested in high risk disruptive ideas, while others are far more conservative.  Some want to achieve a synergy with their other investments, others will only invest in certain industry sectors. Beware of third parties charging upfront fees for introductions without a strong justification. It is rarely a successful approach.

There are also some alternative forms of investment emerging for early stage businesses.  The most obvious is Crowdfunding. This is emerging as a serious approach to getting a business off the ground. The entrepreneur posts the startup on a platform and uses social media to tell normal members of the public about it. They make small investments on the platform.  If a set limit is reached the investment goes through and the platform operator takes a commission. Depending on the platform the entrepreneur gives either equity or payment in kind to the investors.  This approach can be successful but has a number of disadvantages. These include the issues of dealing with multiple investors and the need to promote the startup to potential investors in a crowded market.

To summarise, early stage funding is a critical issue for startup founders.  It needs a carefully planned strategic approach.  The most important thing is to make your startup compelling. This is much more than just a good idea.  It means presenting a strong team with a plan for excellent execution and a strong view on how the investor will achieve a return on investment.

Dreamstake is a platform for early stage high growth potential startups. The platform provides support and access to an investor database via a highly sophisticated screening process. We are constantly on the lookout for top-quartile startups to introduce to our advisory board and other investors on our network.