What MBA student startups must know about seed funding

A salaried job affords a sense of security — in most situations, you receive a cheque at the month-end, come what may. But for someone with a dream, that is not enough — the challenge of business is the oxygen for entrepreneurs. Hence, the attraction for startups!

Is it easy to create a company?

Far from it. Only 50 percent of small businesses in the US make it past five years of operations, with the proportion declining to 30 percent at the 10-year mark. Failure is clearly more common than success, and clearly some work is to be done in the business strategy area.

What is the MBA connection with startups?

B-school students at some stage are bitten by the startup bug, looking to either join a startup or create something of their own. The latter is often why many join B-schools in the first place, particularly when the B-school in question is known to spawn many a successful startup.

The usefulness of an MBA for entrepreneurs is a matter of longstanding debate, with questions on how much they actually learn about global strategy and leadership. That, though, has not halted the startup aspirants. Their desire to learn the basics is not necessarily spurred by plans to create their own startups, but in fact to demonstrate entrepreneurial mindsets to potential future employers. Not surprisingly, among students of the 2019 batch at the Booth School of Business of the University of Chicago, two-thirds confirmed entrepreneurship was among their academic concentrations, up from just half eight years ago.

What motivates someone to launch a startup?

The prime ideal is to take charge of their destinies. Such persons look toward bootstrappers who turned entire industries on their heads through courageous moves and resilient operations. Millennials further boosted this trend, given their fondness for going against conventions and testing limits. MBAs essentially look to startups to connect resources, pursue social good, and create communities.

How important is funding?

Startups are booming across the world, and funding is what they live by. Funds are needed by all businesses, big or small, to start their operations. And when it comes to a startup, more than one round of funding is likely to be needed before sales generate enough cash to finance operations. The amount of capital and funding sources in each round vary by industry and company, and securing this requires strong business strategy.

What are the different rounds of funding?

There is rarely just one round of funding for a startup. Here are the earliest rounds:

Seed funding:

The first stage, this typically comes from personal investments of the founders and investments from family and friends. The high risks and uncertainties keep banks and venture capitalists (VCs) away from seed funding. The amount ranges from USD 250,000–1,000,000.

Angel investors:

These are wealthy individuals or former entrepreneurs who help other entrepreneurs set up their operations. They get high returns on their investments, which they use to help more entrepreneurs. Along with funds between USD 150,000–1,500,000, they also offer process guidance and management expertise.

Why is seed funding required?

The purpose of seed funding is the initial development of the product or service. It is also used for basic infrastructure, improving business plans, conducting market research, or building management teams. Given that firms at this stage have not commenced business and hence the lender risk is higher, investors tend to ask for a higher stake in the startup. Hence, startups are well advised to take on just enough funding to manage operations and develop a product or service prototype, while retaining enough equity for their initial investors and boards of directors. They should try to generate their own funds from sales for as long as possible.

What helps to get an investor on board?

It is a matter of persuasion, for which three elements are essential:

•Strong business concept

•Capable founding team

•Existing and reasonably-sized market opportunity

These are, though, just absolute basics. Most investors also require:

•A demonstration of a working prototype

•Sales to early adopters, also known as “traction”

Most developers these days build a minimum viable product (MVP) quickly, and are able to host and scale it inexpensively courtesy plummeting costs of cloud computing.

As good as these are, what tilts the balance further in favor of the startup will be a close fit between the product and the market, as well as strong sales to early adopters. With these elements in place, chances are bright the seed funding will be secured.

How should a founder approach an investor for seed funding?

There are different stages at which founders can meet investors, and they would do well to cover all bases. Presentations at demo day events are a good way to meet a lot of investors at one place. There are meetups where angel investors introduce founders to the members of their investor networks, which helps to get more contacts and sources. There is of course research to be done to find out recent seed funders who could be tapped for new funding.

What are some good tips for startup founders looking for seed capital?

The following checklist is a good start:

• Create a strong business plan with details on self, market research, and projections

• Seek appointments with relevant banks or other financial institutions
• Approach friends and family
• Get in touch with VCs, though they will take a share in the company
• Talk to angel investors, who will also take a stake but that can later be exchanged for convertible debt
• Look for crowdfunding
• Tap personal savings
• Bring a strategic partner on board — more than 80 percent of companies agree partnerships are essential
• Minimize initial business costs

How helpful are business strategy certifications?

Getting a certification is a great way to be prepared in multiple aspects of global strategy and leadership. A business strategy certification equips the holder to understand the right strategies to employ at the startup and take it to a successful position in the market.

In summation…

Seed funding is not easy. Estimates suggest investors might be evaluating 20 proposals an hour, but funding only a handful every year. Approach them the right way with proper preparation, and your startup should be up and running soon!