Startup Seed Funding for the Rest of Us

A-listers like Lady Gaga and Ashton Kutcher have given venture capitalism a certain glamor. If you’re a business founder looking for seed funding, it’s easy to get caught up in fantasies about which celebrity will invest in your business. But what you should be focusing on is your business plan. After all, investors back businesses, not ideas.

Even in Silicon Valley, where investors are on the lookout for the hottest new company, a start-up will only get funding if it can prove it’s a viable business. Outside Silicon Valley, the challenge is even harder. Investors beyond the Bay Area tend to be more conservative. So, unless you can demonstrate that your start-up is more than just a brilliant idea, you won’t get the seed funding you need.

Here’s the key message: To attract investors, you need to prove your business is viable.

Demonstrating your business’s viability at the start-up stage may sound impossible. After all, how can you show an investor your business is viable before you have funding to actually make it viable?

But there is a way to do just that. It’s called traction.

Traction is a method to show your business model will generate a return on investment. It will prove that your model is based on actual data and not just assumptions about how much money you’ll make.

Start by creating a financial plan that shows how every dollar of funding will result in three dollars of revenue. This will demonstrate to investors that your model is financially viable.

Next, create a prototype to show investors what your idea will look like as a product. Your prototype doesn’t need to be fully functional. You can create a mock-up or a cheap sample using a 3D printer. Or make a video that can be shared online. Entrepreneur Drew Houston used a video demo to show how file-sharing product Dropbox would work long before he created it.

Finally, line customers up by promoting your product before you launch it. Use a service like Launchrock to collect the details of people who may want to buy your creation. Tens of thousands of potential customers were on Houston’s mailing list before Dropbox was released, proving there was a market for his brilliant idea. This type of traction confirms there’s a market for your business concept. And a market is what attracts investors.