When launching a new product or business, most investment experts recommend developing a working prototype before seeking funding from potential investors. A prototype allows investors to connect with your idea on an emotional level, and also helps them understand where you are in the product development process.
Often, it may not be feasible to build a prototype before trying to attract investment capital, especially if you need the seed funding to develop the prototype. Fortunately, it is possible to raise funding without a prototype – if you can convince investors of your project’s worth.
Consider the example of Juan Ramon Zarco, an entrepreneur who has raised capital for his own business ventures and sat on the other side of the table as part of a venture capital team listening to investment pitches.
Zarco recently wrote an Internet business plan that required more than $1 million of investment capital without having a prototype in place. When investors balked at his plan, he adjusted it to deliver a prototype within three to four months. As a result, he raised $300,000 in seed capital.
Clarify the Risks
When evaluating deals, potential investors first look at the amount of risk in your venture. To raise funding without a prototype, Zarco recommends breaking down risk components into three areas:
- Dollar amount. Investors want to know how much funding you’re seeking, and whether it aligns with the actual needs of your idea. Asking for excess capital raises a red flag for investors.
- Your team. In the early stages, investors will sometimes overlook the lack of a prototype if you have a team with exceptional technical skills and proven product talent.Time frame to create a prototype. Investors also want to know how long it will take to deliver a viable prototype. More important, they want to know whether you can accomplish it with the first round of seed money.
Clarifying these components helps investors quantify the risk of funding your business venture, and increases your chances of raising seed capital without a prototype.
Above all, build a convincing case for your business idea. Document a “must have” need for your product or service, and show a clear understanding of the competitive landscape, including competitors, barriers to entry, pricing and more. With a convincing story, investors may lower their perceived risk level and become more open to funding your idea.
If you can’t get investors to bite without a prototype, try alternative sources of financing. If you have a good idea and can make attention-grabbing videos, crowdfunding offers a viable source of investment capital. Other sources of startup funding include family and friends, small business grants, credit cards and bank loans, peer to peer lending, and community development credit unions.
Ideator can also help by putting you in contact with experienced entrepreneurs who can provide feedback on how to approach potential investors. If you have an idea and Internet access, we can help you build it!