THE BLOG

Where Will You Get the Money for Your Startup Idea?

04/15/2014 11:53 am ET | Updated Jun 15, 2014
  • Lee Schneider Communications director at Red Cup Agency. Minimalist. Writing on the intersection of culture and technology

You have a great idea for a startup. All you need is some cash to get your business going. Oh, and a staff, and maybe a place to work that is not a coffee shop. But let's not get ahead of ourselves. Let's start with the money. Let's go get some.

You might get yourself into an incubator, startup lab or accelerator. The famous ones are Idea Lab, Microsoft BizSpark, Y Combinator, Launchpad.la, and my friends at TechStars. They are all ready, willing and able to support the next generation of great ideas. And why not? They want to have a steady stream of ideas to float in the river of capital flowing toward profitability. Right now, smart, happy money stories abound.

You've heard of Uber, the limo company. It started with only $200,000 in seed funding received in 2009, but that was followed by $1.25 million from angel investors, $11 million in Series A funding, $37 million in Series B, and then $258 million in Series C funding from Google Ventures and TPG.

SnapChat started with $485 million in seed funding, followed by a $12.5 million Series A boost, then $60 million in Series B investment, and a $50 million round of Series C funding.

Tumblr? $30 million, followed by $85 million from investors like Graylock Partners, Insight Venture Partners, Chernin Group, and Sir Richard Branson. The company was already backed by Sequoia Capital, Spark Capital and Union Square Ventures - some of the biggest names in the venture cap biz.

Instagram? $500,000 in seed funding, then a $7 million Series A round of funding, followed by a $50 million round of Series B funding.

Those numbers are high enough to make anybody dizzy. And they go higher still. Tumblr was acquired by Yahoo for $1.1 billion, Instagram by Facebook for $1.01 billion. Snapchat turned down a $3 billion acquisition offer from Facebook. Uber is poised to take over the world.

Let's say you want some of that big cash. Aside from flying Virgin Air repeatedly and hoping you'll run into Richard Branson in first class, how can you get your startup started, at least with some seed money?

The way the smart people mentioned above got going was through the angel investor/venture capital pathway. But there's another way.

Oculus Rift, a virtual reality platform, raised $2.4 million with a crowdfunding campaign on Kickstarter. In just 30 days 9,522 backers contributed, receiving perks ranging from an Oculus Rift poster for a $15 contribution, to an unassembled prototype for a $275 contribution, to a $300 developer's kit. One thing those backers didn't get was an equity position in Oculus Rift, a piece of the action in other words, and that made a lot of those backers upset when Facebook bought the company for $2 billion.

Here's the important thing to remember about contribution-based crowdfunding, the kind you find on Kickstarter, IndieGoGo, RocketHub and Razoo. Your backers get good karma, a prototype, a sense of belonging, a tax-deduction if you are a 501 (c) 3 non-profit, maybe a DVD of your movie or a download of your song, but they don't get a piece of the company. (If you want to offer a piece of the company, look up platforms like EarlyShares.com and CircleUp.com, which are equity crowdfunding platforms built for investors.)

Crowdfunding has changed the start up game a lot. No longer are the developers and idea people depending solely upon angel investors or VCs. Using crowdfunding, developers, creators and entrepreneurs are pre-marketing their ideas. They see a need, create a prototype, develop a plan to distribute it, and launch a crowdfunding campaign to support their dream.

The campaign creates two capital streams: The first stream is a flow of social capital. A successful crowdfunding campaign means that you must harness the power of online communications - social media, mailing lists, whatever else you've got - to help the world learn about your idea and potentially support it. Like a good networker, your goal is to introduce yourself to as many people as possible, connect, and give them something to remember you by. When all that is working, these casual online acquaintances can become backers -- and your pre-marketed concept suddenly becomes real. That's the power of social capital. In crowdfunding, social capital generates your stream of financial capital.

Examples? Recent product launch crowdfunding success stories include Skulpt Aim on IndieGoGo. Aim is a wearable fitness monitoring tech project that crowdfunded more than $380,000 to take it to market. The FlyKly Smartwheel is a bicycle pedal assist that launched with a Kickstarter campaign that raised more than $700,000.

Just this past week, an IndieGoGo campaign that originated with the Pasadena Art Center College of design raised $317,784 to support the development and production of an urban transportation solution called URB-E. Picture something like a stylish, foldable electric bike that has a 20 mile range and you've got the picture. It's intelligently aimed at the 'last mile' urban transportation, a mile that has proven troublesome for urban planners and green-city thinkers. More people would take mass transit, say these designers, if it weren't for that last mile. They get off the bus or the light rail train, and the only available stop is just too far from work to make it practical. With forward-looking solutions like URB-E, that last mile dissolves when you jump on your URB-E and zoom away.

The pathway to a successful startup has dramatically changed with the audience-building and cash-attracting tools crowdfunding offers.

I'm hosting a free online conference called Why Your Startup will Succeed. Joining me will be start up experts like Zack Price. Together we will discuss where the money to back your startup might come from, the personality of the successful startupper, and how to form your start up team.