How do I get my first startup financed without bankrupting myself?

QUESTION:

I am in the process of starting a business centered around an invention of mine which is a luxury manufactured good. It’s cheap to make and has a guaranteed large target market. I am hitting speed bumps when it comes to the financing aspect as I am 20 years old and do not have a ton of capital to my name. I don’t want to reach out too far and have no control of my first venture, but at the same time don’t want to bankrupt myself in the process.  Are there any good suggestions you could offer for my bankruptcy questions and financing needs?

ANSWER:

by Naomi Kokubo, Cofounder of Founders Space

Yes, I know the feeling.  No one wants to go bankrupt trying to finance his/her startup.  Here’s my first piece of advice: do something that doesn’t require a lot of capital.  There are millions of opportunities being created every year for new online businesses, and many of them require almost zero startup capital.  Putting up an e-commerce or social site today costs practically nothing if you can code the site yourself or use open source software.

Okay, so this isn’t your vision, and you want to go ahead with manufacturing luxury goods.  Well, that’s a tough one because manufacturing isn’t simple and even cheap goods cost a pretty penny, especially for a 20-year-old without a trust fund.   I think what you need to do is to work on a prototype that you can assemble for a reasonable sum of money, and then spend a lot of time working on your business plan, market analysis, marketing plan, etc.  Put together all the materials a potential investor would want to see before manufacturing anything.

Next, set up a focus group test, where you bring in potential customers and show them your prototype.  Get their feedback, and find out if they’d really buy this from you.  In fact, take pre-orders.  If this is the killer product you think it is, you should be able get at least some people to pre-order.   This is critical.  You need to be able to prove to potential investors that this product will fly off the shelves, and therefore, it’s worth risking their money.

Also go out to local retailers and distributors, and see if they’ll agree to put your product on the shelf when it’s manufactured.  Get their commitment in writing so that you can show potential investors.  If no one pre-orders your product and you get can’t line up distribution commitments, it’s time to go back to the drawing board.  You just saved yourself from bankruptcy.

You may find that you have to go through several prototypes and dozens of focus group tests before this is truly worth pursuing.  Along the way, you’ll learn a huge amount about your product, your customers, and the market.

If you get to the point where you have 50+ pre-orders from individuals and at least a couple distribution commitments, then it’s probably time to tap into angel networks and see if you can get this funded.   I take it you don’t have rich relatives or friends, or don’t want to gamble with their money.  In this case, the next best thing is angels.  Finding local angels who you can meet with face-to-face is always best.  It can be a successful local real estate developer or someone who runs a large business in your area.  Talk to them and get them excited about your idea.   Have them fund a limited manufacturing run and test the market again.

Good luck, and even if you do go bankrupt, you’re only 20!  You can recover.  Just make sure to talk to a lawyer and incorporate or form an LCC for liability protection.