Alternative Businesses: How to Get Cash
Sure, it's mainstream for start-ups to pitch angel investors and venture capital firms. But what happens when your proposed business doesn't fit into the usual funding categories?
That was the topic of a panel on finding funding for ultra-niche start-ups at this year's Northside Festival in Brooklyn, New York.
Panelists Britta Riley, founder of open-source urban agriculture innovators Windowfarms, and Paul Lightfoot of BrightFarms, which is setting out to build the world's largest rooftop farm in Brooklyn, explained their philosophies on making realistic crowdfunding goals, learning to speak new languages, and not taking start-up advice from a lawyer.
Here's how they raised money to get off the ground:
1. Consider the psychology of crowdfunding.
Riley knew she needed $200,000 to get her vertical, hydroponic window-farming business started. She also knew that $200,000 was too daunting a number to put on a Kickstarter campaign.
"There's no way we would have raised the money," she said.
Instead of asking for it all at once, she split her fundraising into two Kickstarter campaigns. She raised $28,000 in the first go-round in 2010, which gave her enough money to develop the idea and start selling some of the kits.
For her second Kickstarter, she calculated the money she needed to raise to invest in equipment, materials and shipping, but the total sounded too high to people; some people said she'd look greedy asking for that much. She decided to go ahead with the more reasonable sounding $50,000 and made it an internal goal to raise the total in the first few days. But the time the campaign finished more than $200,000 above the goal, it had become one of the most successful Kickstarter campaigns ever.
"Everybody just wants to be on board with the winning game," she said. "You have to build all this psychology into t crowdfunding because people don't know anything about finance. It is definitely not a silver bullet either"
2. Be ready to commit a lot of time.
Lightfoot already had started two businesses by the time he decided to get into the rooftop farming market. His goal was to help supplement local food chains with locally grown produce, sold through major grocery stores.
"I had a whole lot of pre-revenue capital to raise," he said. "That's inherently challenging but we did it."
He said the effort of raising capital for his two other ventures prepared him for the huge time commitment involved in raising money, especially if you have a capital-intensive model, such as, say, growing produce on rooftops.
"You definitely need to recognize how much time you'll personally be spending raising capital," he said. "Assume the amount of time raising capital will be much more time intensive than you expect."
But the upside, Lightfoot said, is that going out and asking for money will help you feel out your business plan, which can be particularly helpful if the business is new or innovative.
"Asking clients for money is the most clarifying thing we can go through," he said. "It will make your strategic decisions so much more lively."
3. Learn to speak new languages.
Many niche businesses face a common problem: Traditional investors don't know what the heck to make of them.
"When you're working in a new market that's disruptive, often times you don't fit into the traditional categories," Riley said.
That's why it's important to learn new languages; that is, even if you're just concerned with farming and food, you need to learn how to talk in terms potential investors will understand. She learned you've got to talk about things that will interest them, like how quickly they'll se a return on investment and what your long-term revenue strategy is.
"The challenge is to be able to articulate how your business fits into larger industries," she said. "You have to talk about your business model using their language, not your language."
The other key is to be comfortable speaking legalese and learning lawyer speak so you can negotiate contracts. But since lawyers are risk-averse, the decision to move forward still has to be your own.
"If you try to go to your lawyers for advice, there's no way in hell you're going to start your business," she said. "Get comfortable taking a little bit of law and contract structure in your own hands."
TIM DONNELLY | Columnist | Inc.com Contributor
Tim Donnelly is a freelance writer and managing editor of Brokelyn.com. His work has appeared in Billboard, The Atlantic, Thought Catalog, and The New York Post.