7.2: Startup Funding- Why Funding

CJ Cornell

First, let’s define funding, in the context of entrepreneurship and startup companies. For the purposes of this chapter we are referring to external funding.

As an entrepreneur, you might think you need external funding. External funding usually means:

• Funding (money) exchanged in return for stock in the startup company (equity), loan payments (debt), or for a series of payments (e.g. royalties).
• Funding is not the result of the sale of a product or service.
• The startup receives cash (money that can be deposited into the startup’s bank account)— as opposed to other products/services the company needs. (For instance: If an organization provides your startup with office space, laptops, or servers, this is not considered funding).
• Funding is from a person or organization not officially affiliated with the company (i.e.,—not an employee, founder, or major customer).

Most other forms of funding would be “internal” or organic funding—from the founder’s family, or from consulting or other revenues. While these are valid and common forms of funding for startups, they don’t require formal or deliberate fundraising activities and preparations—and the money is not dependent or controlled by sources unrelated to the company.

When entrepreneurs think about funding, usually their first thoughts are “How much do we need” and “How do we get funding for our project or company?” And then “Where can we find funding?” or “Who can we ask for funding?”

And these are the right questions—but in the wrong order. There are more important questions that need to be asked, and answered, first:

• Why do you need (external) funding?
• What is the unique product or service?
• What specific value will you offer to customers? That is, what is your “value proposition”?
• What is your industry category, or product category?
• What is your mission?
• What are the risks?

Asking those first questions is more than just an exercise, or soul-searching. The answers will, in part, dictate “who” you should be asking for funding. The “who” should be aligned with the “what.” Only then should you work on the “how” to secure funding.

Before we focus on the details of startup funding sources, and how to attract and secure funding, let’s first focus on the “why”—but from the perspective of the funding sources. Knowing why they want to fund a company or project is vital. Your reasons need to be aligned with their reasons. It the reasons are not aligned, then nothing else matters.

If you need funding to pay yourself a salary, pay back loans, or to merely make sure the business can pay its current bills then the chances are you will never obtain outside funding. But if you need funding to advance your product development efforts, launch a new product, to enter new markets, or to grow and expand then your reasons may be more aligned with funders’ reasons.

Discussion/Assignment: Can you think of reasons why people, companies, and organizations with money would want to be the source of funding for startups and new projects?

Reasons for Funding (from the Other Side of the Table)

When anyone provides support, resources or money to someone else, there is always an “agenda,” or motivation. This is not as devious or as mercenary as it sounds. A parent pays their child’s tuition because they want their child to have a better chance at being happy and successful. When a person sends money to a political campaign, or for a climate change awareness group, it’s because they feel these organizations will advance a viewpoint or cause on their behalf. It’s still an investment; it’s just that the return on investment is not explicitly a financial gain.

As a founder of a new venture, new startup, or a new project that might become a new company, your objectives need to be aligned with those of the potential funding source. Talking about how your revolutionary new blockchain technology is going change the quality of life in underdeveloped countries is not going to resonate with a local bank that only cares about loans, interest rates, and collateral.

Every funding source has an intention, motivation, or some kind of potential benefit they expect as a result of providing the funding. They also want to maximize the chances of success and minimize risks of failure. In other words, they want to allocate their funding to projects or companies that have the best chance of advancing their interests.

Here are some of the most common reasons why people and organizations fund new ventures:

Profits Only	A pure financial ROI—usually looking for “windfall” profits (significant financial gains—better than almost any other)
Profits, within an “Investment Thesis”	While financial ROI is the simplest motivation, it is usually not without other interests. For instance a venture capital firm wants windfall profits, of course, but they also may want to invest in companies that advance certain industries or technologies. Or they may invest in companies that demonstrate a culture of diversity, for example.
Economic Development	The funding organization wants to support new companies that will create new jobs within their region.
Ecosystem Development	The funding organization wants to ensure there are many companies innovating around a new technology or platform.
Strategic	The funding organization is looking for startups working on products or technologies, or penetrating markets, that are aligned with the organization (usually a corporation)’s goals.
Charitable, Altruistic	The funding organization is looking for startups that embrace principles (social, business, etc.) that are aligned with the organization’s charitable mission (e.g., advancing women’s health care issues).
Industry Development	Because the funding organization’s mission is a combination of economic development and ecosystem development, it is designed to fund projects that will advance help an entire industry (e.g., Knight Foundation supports Journalism projects).

In-Class Exercise

Web Search: Can you name some funding organizations focusing on ecosystem development? e.g., Bitcoin/Blockchain, Mobile/Android funds. Facebook app funds(s); or, other funding initiatives and organizations that are not strictly for profit.

Now, let’s look at the most common reasons why entrepreneurs seek outside funding for their projects and companies.

Reasons for Funding (from the Entrepreneur’s Perspective)—a.k.a. “Use of Proceeds”

Reason	Description	Investor/Funder perspective
Establishment	Funding for essential legal work, website, physical location	Usually of very little interest (as the sole reason for funding)
Research	Activities exploring new product, marketability, customer demand, etc.	Usually of very little interest (as the sole reason)—may be of interest if combined with other reasons
Development	Substantial and tangible product development, or market development	Of interest to seed-stage or early stage funders—though they will need evidence of market viability, and other evidence that reduces risk
Growth	Rapidly expanding sales, or customer acquisition, or market share—via hiring and accelerated product development or distribution.	Of high interest—particularly to the profit-focused funders
Operations, Salaries	Paying for day-to-day expenses, such as rent and salaries	Of little interest to any funding source, unless combined with other primary reasons
Expansion	Creating new products or entering new markets—once the startup is established with a product and a market	Of interest to many kinds of funding sources depending on the market and category
Purchase of Assets	Such as manufacturing equipment, patents, exclusive IP rights, inventory	Of primary interest to banks and other lending institutions. Medium-low interest from other funding sources unless combined with other reasons
Debt, Prior Expenses	Paying off loans, paying back founders for costs incurred. Paying back credit card debt	Of little interest to any funding source, and a detriment (“turn off”) if mentioned

Discussion: Can you think of reasons why a company—particularly a startup—might want to raise money—even if they *have* money?

Before embarking on the funding journey, it’s critical to be very self-aware of your reasons for needing funding, the kind of company you are, and what value you offer. Only then can you start pursuing potential funders whose methods and mission are aligned with yours. Otherwise, it’s a long, painful, and frustrating exercise in futility—a path many entrepreneurs take on the road to failure.

Preparation

All funding requires some preparation and pre-requisites (even winning the lottery requires buying a ticket). Applying for loans requires forms, documentation, and collateral.

Most funding sources for startups require a set of presentation materials, or a deliberate application.

Generally all will require:

• Description of a clear market problem/pain you are solving (or a new market opportunity you are addressing)
• Clear descriptions of the company and idea (product or service)
• A solid and capable management team
• Customer/market validation:
  • Evidence that you are addressing a big market problem or opportunity
  • Evidence of a market, and evidence of customer traction
  • Any external validation or endorsements
• Product/service innovation (USP)
  • Evidence of product viability (that the innovation will translate into a product)
• Financials—estimates/forecasts of costs, revenues and profits
• ROI potential, growth potential
• Funding request/requirements, use of proceeds

If you’re starting a social entrepreneurship venture, then the ROI or financials might not be a requirement, but there may be more requirements about describing the social impact. Very early stage companies (idea stage) won’t have most of this information. Idea-stage companies typically seek funding that will help them develop the idea to the point where they will be able to answer that list of questions.

Resources

Here are some examples and recommendations as you prepare your pitch.

• Sequoia Capital Pitch Deck Template ^[1]
• The Only 10 Slides You Need in Your Pitch ^[2]
• Lessons From A Study of Perfect Pitch Decks ^[3]
• Funded Pitch Decks ^[4]
• All the Public Startup Pitch Decks in One Place ^[5]
• The Ultimate Startup Funding Pitch Deck ^[6]
• Free Templates for Great Startup Pitch Decks, Direct from VCs ^[7]

Key Takeaways

1. The startup should be clear on the reasons they need outside funding.
2. The startup should understand the different sources of funding available (and the motivations of each kind of funding source).
3. The startup should make sure that their reasons are aligned with the funding source’s reasons.

CJ Cornell is a serial entrepreneur, investor, advisor, mentor, author, speaker, and educator. He is the author of the best-selling book: The Age of Metapreneurship—A Journey into the Future of Entrepreneurship ^[8] and the upcoming book: The Startup Brain Trust—A Guidebook for Startups, Entrepreneurs, and the Experts that Help them Become Great. Reach him on Twitter at @cjcornell.

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1. “Sequoia Capital Pitch Deck Template,” Slideshare, https://www.slideshare.net/PitchDeckCoach/sequoia-capital-pitchdecktemplate. ↵
   
2. Guy Kawasaki, “The Only 10 Slides You Need in Your Pitch,” GuyKawasaki.com, guykawasaki.com/the-only-10-slides-you-need-in—your-pitch/. ↵
   
3. Kim-Mai Cutler, “Lessons from a Study of Perfect Pitch Decks,” TechCrunch.com, June 8, 2015, https://techcrunch.com/2015/06/08/lessons-from-a-study-of-perfect-pitch-decks-vcs-spend-an-average-of-3-minutes-44-seconds-on-them. ↵
   
4. “Funded Startup Pitch Deck Repository,” https://www.fundedpitchdecks.com/. ↵
   
5. Andy Sparks, “All the Public Startup Pitch Decks in One Place,” Medium, Jan. 10, 2017. https://medium.com/startup-grind/all-the-public-startup-pitch-decks-in-one-place-7d3ddff33bdc. ↵
   
6. Chance Barnett, “The Ultimate Startup Funding Pitch Deck,” Medium, Aug. 12, 2016, https://medium.com/@chancebar/the-ultimate-startup-funding-pitch-deck-1c1565eeb324. ↵
   
7. David Beisel, “Free Templates for Great Startup Pitch Decks, Direct from VCs,” Traction, February 3, 2015, http://nextviewventures.com/blog/free-startup-pitch-decks-template/. ↵
   
8. Cornell, CJ, The Age of Metapreneurship, (Phoenix: Venture Point Press, 2017). www.amazon.com/dp/069287724X. ↵