Funding for an expensive startup

MahasMahas Posts: 2subscriber Member

Hi

I am part of a team aiming to obtain funding for an exciting yet very expensive startup.

The startup needs substantial amount of money: 5+ million to get everything ready and another 3 million for opening and final setup. All these before we even starts making money. On the upside, based on our analysis we believe we can make 50+ million revenue with about 25 million profit each year with high potential on expansions.

The business is an educational/entertainment centre but with some interesting novelties. Think of it as a novel educational Arcade game style business.

So we are at a stage to start looking for funding. We want advice on how to approach this. Things we need to consider when going for such a big amount (e.g., usually process, time, stages,etc)? What percentage of the business should we expect?

Assume that we have the expertise and knowledge on the business/idea, but not on funding or the way investors/funders go about funding such a business. Also assume we have done a good market analysis, feasibility, costing, etc and we have good evidence for above numbers.

The problem is that we are not building a product to start small and gradually go bigger. Instead we are building a new educational/fun centre with specialized machines, so we need the entire funding to setup everything and get the business started.

Thanks a lot. Any help/advise would be great.

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Answers

  • dtech57dtech57 Posts: 3subscriber Member

    Hello, Mahas!

    It's exciting to hear that you're beginning to kick off your venture! With $50m in rev and $25m profit each year, it sounds like you have an extremely capital intensive process.

    A great place to start would be reaching out to accelerators and incubators. Start to cultivate those relationships that you might not previously have had. That's going to be the name of this game. For anyone that's willing to cut a check of that size (appx. $8m), it's going to take a well-connected, well-respected investor to get the ball rolling. Reaching one of those investors, outside of pure luck, is going to require a warm introduction from a trusted colleague or another investor. So starting to build those relationships is paramount.

    As far as time is concerned, there are a ton of factors that go into that. I've seen larger amounts raised in less time, and I've seen it take years for people to raise $250k. Not to take it back to the basics, but the main thing is being able to demonstrate that you've identified an acute pain or problem in a lucrative or emerging market, and you're solving that problem with a uniquely positioned (preferably behind an IP moat) solution that drives a profitable action.

    Do you have a working prototype? It sounds like you would greatly benefit from having an MVP that highlights your unique advantages and the portion of the process that proves out your business model (i.e. instead of having a complete arcade of games built out, is there a particular subject that solves the problem of the most people that you could test with). Having those testimonies, acquisition numbers, retention rates, promised sales, etc. would go a really long way with any serious investor.

    Have you considered crowdfunding for building out an MVP? I know a lot of people might be leery of crowdfunding because it's in its infancy, but it's a great way for consumer-facing products to raise a decent amount of capital while also starting to gather a following, press coverage, and the like.

    I hope this was helpful!

  • MahasMahas Posts: 2subscriber Member

    Hi dtech57,

    Thank you very much for your answer, it is very helpful.

    I do agree that starting to build relationships to reach a suitable investor is critical at our stage.

    As for the working prototype or an MVP, unfortunately we don't have one yet. We can build one of the machines but it can be expensive for us. Going with crowdfunding for the MVP may be OK but we worry about two aspects: (1) we don't have anything to give back to those who are crowdfunding us since we are not building a product - we can however offer free tickets for example when the center is open; and (2) although the idea is niche and requires high expertise for implementation, we still worry that putting the idea out there may bring early unwanted competitors especially since we don't know how fast we can secure investor/s. I'm not sure if our worries are reasonable though. We will probably first approach accelerators/incubators first and see how we go.

    Any comments/feedback from you or others is greatly welcomed. Thanks again.

  • dtech57dtech57 Posts: 3subscriber Member
    edited January 2

    Mahas,

    Absolutely no problem, at all!

    It sounds like you're referencing rewards-based crowdfunding (Kickstarter, Indiegogo, etc). Are you familiar with equity-based crowdfunding (MicroVentures, Republic, StartEngine, WeFunder)? You wouldn't actually have to offer a physical product to potential investors. In return, you would actually be offering equity to potential investors (who, often times, are accredited investors themselves, but not always). The platforms, themselves, will often work with you to determine an appropriate valuation, and they are usually pretty favorable to the company. The way a lot of these agreements are structured also keep your cap table fairly clean. Depending on which regulation you raise under, you could raise up to $1,070,000 in a year under Reg CF (which could be a good start to standing up a prototype), or even more than that under Reg A (these are basically mini-IPOs, but are much more time/labor/cost intensive than traditional crowdfunding campaigns).

    Your second concern is a very common one when it comes to what people think of crowdfunding. Have you considered filing for a patent or at least explored what that process/likelihood might look like?

    If you have any other specific questions about crowdfunding, just let me know, and I will be happy to help out! I am by no means, an expert, but I do have some experience with the field.

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