How Students Can Launch And Fund Their Startup Ventures

Craig: Get as far down the racetrack as you can before you have to start asking for funding. It’s a good exercise to figure out how many resources you need prior to making the financial ask of someone else. Ask yourself, “Can I resource or bring on a co-founder to do the work ourselves to get to a working prototype before asking for funding that will take my equity down too early in the process?”

Linda: LaunchPad ventures at Syracuse University have raised more than $43 million in outside equity investment. That’s a pretty impressive amount for student startups. To get founders ready to approach funders we put them through an intensive “investment-ready” process that focuses on customer discovery and validation, along with product development and a business model roadmap.

We are a very mentor-driven program so the rigor of our process, along with the engagement of subject matter experts to help achieve key milestones, helps “de-risk” investments by funders. It gives founders a realistic sense of what will be expected by investors and gives funders the confidence that student startups are receiving the technical assistance and strategic advice they need to help them succeed.

To get founders ready we put them through campus, state, and national business competitions to refine their pitch and be ready to answer tough questions from funders. We help them test every assumption so they are approaching investors having done the hard work of research and external validation. We make sure they have both the hard and soft skills required to helm a startup. That means product and market expertise, but also the tough stuff that goes into being a student founder—team building and conflict resolution, decision-making and delegation, discipline, problem-solving, and resilience.

Rhonda: The same “funding readiness” rules apply to all startups—there must be evidence of product-market fit, preferably in the form of sales. Investors of all types are looking for this traction as evidence that the company has eliminated most of the risk and is ready to scale sales.

Yohan: Before seeking funding, student startup founders should identify target customers and validate the demand for their ideas. Students often come up with interesting entrepreneurial ideas, but they often become obsessed with the idea itself without a clear understanding of who their customers are and whether their ideas can really solve customers’ problems. Given that many startups fail because they make a product or service that customers do not want (i.e., a product/service that does not solve customers’ problems) (Eisenmann 2021), such customer discovery and market validation are crucial in the entrepreneurship process.

Indeed, investors tend to reject business proposals of inexperienced entrepreneurs like student founders due to their lack of ability to validate the market demand (Carpentier and Suret 2015). Thus, as suggested by mainstream innovation methods such as the lean startup method and design thinking, student founders should create a minimum viable product (MVP)—a prototype with core features—and show it off to potential customers who then provide valuable feedback on it. Based on such feedback, student founders can improve their product/service. Iterations of this process will help them create a product/service that solves customers’ problems and help them to be ready to seek funding.

References

Eisenmann, Tom. 2021. “Why Startups Fail.” Harvard Business Review. 2021. https://doi.org/10.1007/978-1-4302-4141-6.

Carpentier, Cécile, and Jean Marc Suret. 2015. “Angel Group Members’ Decision Process and Rejection Criteria: A Longitudinal Analysis.” Journal of Business Venturing 30 (6): 808–21. https://doi.org/10.1016/j.jbusvent.2015.04.002.

Craig: Normally, sweat equity should be first. A lot of investors want to see you put your own money into it. Then ask friends and family. They trust you, know you, have confidence in you, and can help you a tremendous amount. Then move into boutique PE firms or family funds before you go into larger VC or grander Series firms.

Craig: Getting a solid prototype should be number one. In short order, you want to understand who your customers are and progressively, who they will be. You want your metrics memorized, like what your customer acquisition costs are. Know the ins and outs, breathe your business, inside, outside, and upside down. Know the business and know your numbers.

It’s important to have and recruit experienced talent on the team when you want to be taken seriously. Investors are investing in the industry as the vehicle based on information they may already know, and you are one driver of many, taking strides in that industry. To be the best, you want to be efficient, strategic, and competitively advantaged.

Linda: It’s interesting how this has changed in the past few years. In the past, investors have been more focused on business plans and financial projections. Now, it’s rare to see an investor request a written business plan, although going through that strategic process is an important learning experience for a student founder.

Now, it’s all about the team and the market. Funders invest in people over ideas, so they are looking for core strengths in a founder. They are looking at the quality of the team and advisors. They are looking for work ethic as well as the quality of the work.

They are laser-focused on path to market. They want to see actual users and an impressive waitlist. They want to see traction, demonstrated market demand, and a solid MVP. We give student teams a very long list of questions they should be ready to answer to help pitch and to prepare for evaluation and the diligence process.

Rhonda: Student founders will be expected to leave school upon receiving any type of substantial funding. I know of three cases just this year (two undergraduate companies, one first-year MBA company). In these cases, investors cared more about the velocity of month-over-month growth than the experience of the team and didn’t hold their traction to a higher standard than for non-student founders. Student founders don’t necessarily get dinged for inexperience, but coachability is a “must-have.” Investors can usually replace the parts of a founding team they deem ineffective.

Craig: It always helps to have an advisor on board to supplement the experience for an investor. When an investor is working with a student, they may assume that the student hasn’t grown a company before, so there’s a lot to cut their teeth on.

Additionally, investors like to see that a student expresses a realistic understanding of what things cost to fund the business, and how to use the funds they are given. Too often, a student will undervalue certain costs and overvalue others. Use mentors, advisors, and your network at large to arrive at the best answer here.

Yohan: While investors may try to invest in startups with both a strong jockey (i.e., entrepreneur team) and horse (i.e., entrepreneurial idea), different investors may weigh one more heavily than the other. For instance, research shows that venture capitalists tend to place more weight on the entrepreneur team than the entrepreneurial idea and market (Gompers et al., 2020). Often, investors provide their investment decision criteria on their websites, so it is advisable for student founders to look at such information before seeking funding. There are several venture capital firms solely focused on investment in student-founded startups and major accelerators such as Y-Combinator often invest in student-founded startups.

Reference

Gompers, P.A., Gornall, W., Kaplan, S.N. and Strebulaev, I.A., 2020. How do venture capitalists make decisions?. Journal of Financial Economics, 135(1), pp.169-190.

Craig: Going too early is a big mistake. You give away a lot of your company in the early stages when it’s worth nothing. Find a way to get a little further down the road to a prototype or even to your first paying customer (known as revenue-generating vs. pre-revenue before asking for investment).

Linda: Student founders need to understand the entire capital continuum. Pre-seed investors have moved farther along the early stage continuum and want to see customers. That means student startups have to be extra resourceful about finding non-dilutive funding.

Early sources of capital typically include bootstrapping, sweat equity contributions from founders and team members, personal investment, financial support from family and friends, and winnings from business plan competitions. Mounting a successful crowdfunding campaign can help with funding and just as importantly demonstrate market enthusiasm.

Many campuses, like Syracuse University, offer funding programs to help student ventures with small grants for research, prototyping, legal incorporation, and patent work. Many places also offer grants through community-based incubators because they know that funding local student startups is a smart talent-retention strategy. We strongly advise students to apply for accelerator programs which are great avenues for networking and initial investment capital. We have a strong partnership here at Syracuse University with Techstars which has been an amazing collaborator.

In addition to traditional VC, we also encourage students to explore low-cost working capital SBA loans, as well as alternative lenders such as non-profit CDFI’s or banks. Finally, we really drill down on early sales because earned revenue is the most capital-efficient way to fund a startup. And sales make a startup most attractive to eventual venture investors.

Rhonda: There are multiple alternatives to venture capital for student startups—non-dilutive funding such as SBIR grants can be valuable resources. Each federal agency has a slightly different program (NSF, NASA, NIH, DOE, etc.). For example, NSF’s SBIR programs have three phases and offer up to $1.5 million in non-dilutive funding. Venturewell’s eTeam program is also an awesome student-focused resource—$5K for the first phase with $20K available for prototype development in the second phase.

Yohan: Viable alternatives to traditional venture capital exist. Among the alternatives such as angel investors, accelerators, crowdfunding, small business loans, and university entrepreneurship programs, great avenues for student founders specifically include accelerators and university entrepreneurship programs.

Unlike other alternatives, these programs help students not only obtain initial funding; they also help students learn how to validate the market demand—a crucial ability for inexperienced entrepreneurs like student founders. For instance, accelerators—fixed-term, cohort-based programs that include mentorship and educational components and culminate in a public pitch event—provide seed money and help startups rapidly move forward in the development life cycle (Hallen, Cohen, and Bingham, 2020). While such “accelerated” venture development helps entrepreneurs learn the value of their ideas (Cohen, Bingham, and Hallen 2018), it also leads less-promising startups to close down quickly (Yu 2019).

However, even if student founders end up failing quickly, an accelerator program may be a good opportunity for them to learn how to validate the market demand, expand their network (mentors, cohort entrepreneurs, and investors), and pivot to a better entrepreneurial idea.

University entrepreneurship programs are another viable alternative for early-stage student startups. Such programs often provide seed money for MVP development or customer discovery without requiring part ownership of the startup company. Further, they also often provide education on customer discovery and idea execution. Research shows that university entrepreneurship programs help students learn their ability as an entrepreneur and help increase the performance of student-founded startups (Eesley and Lee 2021).

References

Cohen, Susan L., Christopher B. Bingham, and Benjamin L. Hallen. 2018. “The Role of Accelerator Designs in Mitigating Bounded Rationality in New Ventures.” Administrative Science Quarterly. https://doi.org/10.1177/0001839218782131.

Cohen, S., Fehder, D.C., Hochberg, Y.V. and Murray, F., 2019. The design of startup accelerators. Research Policy, 48(7), pp.1781-1797

Eesley, Charles E., and Yong Suk Lee. 2021. “Do University Entrepreneurship Programs Promote Entrepreneurship?” Strategic Management Journal 42 (4): 833–61. https://doi.org/10.1002/smj.3246.

Hallen, B.L., Cohen, S.L. and Bingham, C.B., 2020. Do accelerators work? If so, how?. Organization Science, 31(2), pp.378-414.

Yu, Sandy. 2019. “How Do Accelerators Impact the Performance of High-Technology Ventures?” Management Science, October, mnsc.2018.3256. https://doi.org/10.1287/mnsc.2018.3256.