It’s one of the first questions that pops into every aspiring entrepreneurs’ head when it comes to starting a business. As daunting as it seems, the reality is that there is no simple answer and the consequences of getting this single decision wrong may be catastrophic.
Every business has its own unique needs and personality. The founders of the company have different goals and personalities as well and all these factors need to be considered.
In my opinion, seed funding can be ideal for businesses that are more certain and where you can easily explain the business to a backer because the business idea is quite conventional.
What I mean by this is a business that’s involved in assets, such as a retail business, where the investor can see there will be tangible assets in the business that will reduce risk. Or the alternative is where the business is a new kind of idea that could “change the world” so the potential upside to investing is massive and so a backer will understand the risk profile is higher, but the payoff is massive. Internet-based businesses are a good example here.
The problem with seed funding is in situations between those two extremes. For example, what if you have a new idea that has never been done before, so it is risky. But it is not an idea that is going to be a multi-billion dollar company if it does succeed. What’s surprising is most ideas are like this and they are new, risky but not Google, Apple or Uber.
This is the area that seed funding can be a terrible idea. In this case, the risk is there but the reward is also limited. You are talking high risk and low reward, and that’s a terrible place to be for someone who wants to back your new idea. That’s the place I found myself in back in 1995 when I was trying to develop a new product. I could not get any backing, and people thought I was mad as I “was doing it all wrong”.
The result is that ideas that can be perfectly viable get totally destroyed by the investment community because they won’t back it. One of the main issues is investors will often do their market research and then believe what you are doing is wrong as that is not how the industry works. I am sure the people in the ice harvesting business thought that about refrigeration. The result is, it’s a lot harder to get a new idea to be accepted before it has been proven in the market.
What all this means is that the best seed funding you can get for a new type of idea is funding generated by selling your product. There is no better proof in your idea than seeing it sell and generate income. So I say, go for it. Try and get your product functioning and get someone to buy it. Even if it is a smaller, simpler version of your dream product. Even if it is a slightly different group of people than you really want to go after long term. But just find a way to generate income. Use that income to fund your growth and then slowly expand and get better.
Honda started with motorbikes, then eventually moved into cars and now they make jet engines and aircraft. What a story. Make that your story and prove to the world your idea is robust and profitable by just going for it. What’s the worst that can happen? You will learn a lot and get experiences from bootstrapping that you never would get from a large investment. It’s a totally different type of business because its core will be creativity.
Blackmagic Design started out being driven by creativity and we continue to be a creative company. We found employees and customers that shared our creative passion, and if you surround yourself with like-minded people who want to innovate, you can achieve anything and your whole community will benefit. It is best kind of win-win scenario possible!
Grant Petty, CEO & Founder, Blackmagic Design.