How do we fund our idea and make it sustainable?

1. Your Funding/Sustainability Checklist

We have built a plan to raise capital:

  • We are aware of the sources of funding available

  • We have reflected on who, in an ideal world, our initial investors would be 

  • We understand the pros and cons of bootstrapping , crowdfunding, and VC funding 

  • We are aware of the incubator opportunities (at Harvard, in the Boston area, and beyond) 

  • We are aware of the across the pros and cons of joining an incubator

 

2. How can we raise funds?

With an understanding of your funding requirements you are probably thinking about how you might raise money. There are a few common options we have seen students take up. 

 

Self funding: 

Also known as ‘bootstrapping’ self-funding will be a good idea for you if you have access to some funds and do not wish to dilute the ownership of your organization by taking funding in exchange for equity. The decision to invest your own money in your idea is very personal but most founders expend at least some of their own resources as they get started. Future investors are likely to be looking for this as a sign of commitment to the idea and its success. 

 

We understand that finances can be extremely tight for students and by no means expect students to have discretionary funding for business ideas. We hope the HILT student grants provide some help and HILT Fellows are always happy to provide advice on other funding options. 

 

Raising funds from competitions: 

Free money? Who would say no to that? Competitions can be a great way to get access to funding without giving up any control of your organization, maintaining flexibility around how you build your idea including when you pivot or even abandon it. 

Competitions often mean access to new advice and feedback on your work from judges and advisors. they can also signal to future team members, customers, and investors that your idea has credibility and branding. 

 

Like anything, it is worth weighing up the pros and cons of going after funding from competitions. One drawback with competitions is that they can require a lot of effort to apply for and pitch to. We heard from one former HBS entrepreneur that he got caught in a trap of making pitch deck after pitch deck and it took away from time spent actually building the idea. HBS graduate, Gorrick Ng said he traded off time for the possibility of money. “I think I was both stingey and indecisive so I did not want to give up ownership or commit fully to an idea by taking on VC funds. In the end, it cost me a lot of time but I maintained flexibility. That was the decision I made.”  

 

Raising funding in exchange for equity - VC funding:

 

If you are committed to your idea for the foreseeable future and have a solid business plan underpinning your idea which solves a clearly defined problem then you might be a good candidate for raising venture capital funding. Venture capital is the process of investors funding companies in return for taking an ownership stake in the company (in the form of equiy) and sometimes control (either as advisors or with voting rights on the company’s board). 

 

VC funding often opens up the capital that companies need to invest, build, and grow. VC funding has played a role in launching almost all of the big household name tech companies. However taking on VC funding is not for everyone, it comes with a couple of drawbacks. 

 

First, it can be a tough and time-consuming process to convince VC funds to give you money. We heard from one HBS entrepreneur that “ the VC route required me to go on a whole roadshow of meetings and scheduling, pitching and repitching.” You need to be prepared to put in the time, listen to critical feedback, adapt your idea based on that feedback and likely hear ‘no’ more than you want to. 

 

Second, if you are able to generate VC funding there are going to be some strings attached. You might give up a percentage of the equity in the company and allow a VC representative to have a say in the direction of your business.  One former HBS founder we spoke to said “I was under the impression that raising VC funding would be hard and ultimately lock me into my idea, which I wasn’t ready to do.” Ultimately, there will be pressure on you to generate a return. 

 

Lastly, you have less freedom to completely change your idea or stop working on it altogether, your work is almost like a loan you are repaying and you need to fulfill your commitment per the term sheet you entered into with the VC firm. 

Incubators and accelerators: 

 

Perhaps the main draw of an incubator/accelerator is the access to a community of other founders and advisors with structured milestones to help you grow your idea. A former Harvard College student, CEO and Founder of ed tech company Clever, Tyler Bosmeny said “entrepreneurship can be a lonely journey but having other people around to support you on that journey can make all the difference. The incubator path with Y-combinator provided that for us.” 

 

3. How much funding do we really need?

If you want to build a unicorn (billion-dollar company), you’ll need to have line of sight to revenue in the hundreds of millions of dollars and/or monthly active users in the tens of millions. As much as the media likes to focus on unicorns, however, most successful businesses are not unicorns—and don’t need to be unicorns. With there being 5.6M businesses in the U.S. and only 325 of them being unicorns, you don’t need to build a unicorn to be successful. As much as VCs like to see a market potential in the billions, not all ideas will be that big—nor do they have to be that big. The only reason why VCs want to see a “billion” on a pitch is because they need to be assured that there is at least the potential for a massive return on their investment. If you begin with the goal of wanting to build a unicorn, then yes—you’ll need to find a big market. However, personally, I think focusing on what’s VC-worthy is putting the cart before the horse. After all, we’re here to solve problems, not to give VCs their return.

 

Instead of asking yourself, “How can I find a VC-backable business?” I would instead suggest that you ask, “What needs to happen for me to build a sustainable organization that I can work on full-time?” All you need to do is make sure that your revenues exceed your costs (how much you plan to pay yourself and your team + how much it costs to acquire customers + however much it costs to build/run the product/service). Say you and each of your 3 teammates want to make at $100,000/yr. That’s $400,000/yr. Add the cost of office space and other expenses such as marketing and say you end up with $800,000 in annual costs. This means that you’ll eventually need to make at least this amount each year to keep the lights on. This is when your organization is “breaking even.” You probably don’t need office space at the beginning and should probably not pay yourself a six-figure salary on your first day. $800,000 is what you’ll need eventually, whether you decide to build a for-profit (in which case your revenue will be coming from your customers) or a non-profit (in which case your revenue will be coming from donors).

 

Once you determine how much you need to make, next you want to determine what you have to believe for the market to absorb a fix to the problem you’re solving. Say you’re solving a pain that might involve a solution to be sold to parents during back to school season. A search for “average back to school spend” suggests that parents spend an average of $685/child. One of the reports suggests that parents spend $187.10 on electronics, $138.66 on shoes, and $122.13 on supplies (totalling $448). The exact numbers don’t matter. What matters is that parents spend ~$400-$700. The question then becomes, “How willing are parents to allocate a portion of their spending to solve their pain?” And, “Wwhat % of parents do you believe are willing to make the switch?” Do some math on the back of a napkin. If the assumptions seem reasonable, you’re good enough to move on.

Questions to ask yourself:

  • How much do we need to make in revenue annually to work on this idea full-time?

  • What do I have to believe to be able to make this amount of revenue?

 

4. How should we raise funding to scale?

The first thing to do is to figure out exactly how much money you need and for what purpose. This in turn involves building out your business plan for the next 18 months at least – while you should have a rough plan ready for what will happen after that, things change so much in new organizations that it’s too hard to plan the details for after that duration. Based on your business plan, build out your financial model – there are standard templates available online. If you are inexperienced in financial modeling, sit down with a more seasoned entrepreneur and get them to help you – a first cut model can be made in just a few hours. A key factor is to figure out how your working capital needs will scale – organizations have died because they accounted for growth but didn’t properly project upfront costs or delayed revenue. Note that school systems and districts often have long sales cycles – be careful when projecting your metrics.

 

An important thing to keep in mind is to only fundraise for what you need right now to grow your idea/product, service. Don't try to get a huge lump of money until you know exactly what you need and why. This takes away too much of your focus and needs to relinquishing too much control or equity. 

 

Based on the type of organization you are (for-profit vs non-profit), you will identify whether grants, equity investments or debt are the best source of funding for you. Regardless of your model, you want a SUSTAINABLE business model. Non-profit does not mean deficit. So, income should be greater than spending. The difference between nonprofit and for-profit is really about WHO benefits from the revenue -- stakeholders or beneficiaries. Surplus income produced by nonprofits just means you have more funding to put back into the organization/mission while For-profit means profits can go to shareholders.

 

Typically, non-profits rely on grants, retail fundraising and earned income – early stage orgs will need patient anchor donors till their user revenues (individuals or schools) start coming in. Crowdsourced funding may have worked till now, but may be hard to scale up. For-profits can access equity investments by individuals or institutions, and the funding ecosystem here is quite large – Crunchbase is a great resource to understand which funders work in your space. Specialist organisations have come up to fund social enterprises at the early stage – Echoing Green and DRK Foundation are good examples, while even Y Combinator now incubates non-profits. Loans are generally more complex – if you have substantial revenue, assets and proof of concept, then explore this more.

 

Keep tracking the news and sign up for google alerts in your space to understand who is getting funded and by whom. Attend industry conferences and keep pitching – I’ve known organisations who were mocked early on by conference judges but are doing phenomenally now - so don’t be discouraged. There are also many examples of founders that met 100+ investors before they raised money and went on a hugely successful trajectory. Use your board and advisor network extensively – that’s what its for!

 

When you start getting investment offers, make sure you understand what the terms and conditions are. This is not the sort of stuff that you automatically click at the end of online subscriptions. Get an experienced lawyer and investment advisor to look at these on your behalf – always remember that the investor on the other side of the table has probably been doing this full time, for a long time. Getting into a bad deal can have huge consequences – for example, having 3X liquidation preference for investors may mean that you could sell your company for millions but end up getting nothing yourself. If the previous sentence meant nothing to you, reach out to advisors and start reading up online.

 

Also, be very careful who you allow on the board from among your funders. They are a part of your credibility and network in the future. You may think you have limited bargaining power, but you would be surprised by the power and influence that founders have.

Questions to ask yourself:

  • How much money do we need?

  • What is the best source of money for us at this stage?

  • Who in my network can we tap to connect us to investors?

  • Are we leveraging existing investors effectively?

  • Are we distinguishing between funds needed to scale or for working capital?

  • Does this term sheet look too good to be true?

 

Resources at Harvard

Competitions:

MassChallenge

https://masschallenge.org/programs-boston

HGSE Zaentz Early Education Innovation Challenge

https://zaentz.gse.harvard.edu/innovation-challenge

 

Milken-Penn GSE Education Business Plan Competition

https://www.educationcompetition.org/

 

Reimagine Education Conference & Awards

http://www.reimagine-education.com/

 

HBS New Venture Competition

https://www.hbs.edu/newventurecompetition/Pages/default.aspx

 

Harvard President’s Innovation Challenge

https://innovationlabs.harvard.edu/presidents-innovation-challenge/

 

University of Oregon New Venture Championship

https://business.uoregon.edu/nvc

 

MIT $100K

http://www.mit100k.org/

 

BMO Financial Group Apex Business Plan Competition

http://www.unb.ca/fredericton/business/ibec/bmo-apex/index.html

 

Queen's Entrepreneurs' Competition

https://theqec.com/

 

Harvard College i3 Competition

http://tech.seas.harvard.edu/harvardi3/

 

MIT SOLVE

https://solve.mit.edu/

 

Global Social Venture Competition

http://gsvc.org/

 

Making Caring Common, Dean's Challenge, HGSE

https://mcc.gse.harvard.edu/hgse-mcc-challenge

VC Funding:

RallyCry Ventures

https://rallycry.vc/

Rough Draft Ventures

http://www.roughdraft.vc/

 

Dorm Room Fund

https://www.dormroomfund.com/

 

Echoing Green

https://www.echoinggreen.org/

Incubators and Accelerators: 

LearnLaunch

http://learnlaunch.com/

MIT Delta V

http://entrepreneurship.mit.edu/accelerator/

 

MassChallenge

https://masschallenge.org/programs-boston

 

Techstars Impact Accelerator

https://www.techstars.com/programs/impact-program/

 

Cogo Labs

https://www.builtinboston.com/company/cogo-labs

Know of more resources?

 

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