Rishi Chowdhury of IncuBus Ventures offers advice on how startups can spend the seed money they get from an incubator programme.
There tend to be a few models for incubators – No fee, no funding (usually government-backed in some way), Service fee with zero funding but 0% equity taken (best if you’re looking to raise serious investment) or Investment in return for equity (usually a fee taken from that initial investment).
Let’s take a look at the incubators for which you get investment and give up some equity.
Typically, an incubator will invest less than £20,000 per team but this varies wildly from programme to programme. Think of this investment as a way to help you close your seed round upon leaving the incubator.
So how do you spend the seed money?
You can pay yourself out of this, but look at it as everything you take is going to decrease the amount of resource you can allocate to the long term success of the business – £20,000 is not a lot when it comes to running a business.
You’re going to have to take hits on the luxuries in life but at the same time ensure you have enough to survive. Basic living costs don’t need to be much after rent.
You can develop your product, but be sure what you’re building is what your customers will use & love. If you don’t know that, spend as little as you can here.
Get out your ‘Minimal Viable Product’ so that you can test it with customers and keep tweaking it. I can’t even count how many startups I’ve seen spend all their money on fancy slick products and excess features only for ‘users’ to not use it.
Many folded and many went back after learning this costly mistake, and built a cheap stripped down version – They got feedback at every step along the way and made something which was being used.
Leading into research – I’d highly recommend putting enough resource into customer development, to ensure it gets done to the highest standard if it hasn’t already been done.
Figure out who you’re solving a problem for and if you’re actually solving their problem. Understand your customer inside out. Build a profile of your different customers, look which customer segment is easiest to get to and your best aligned to.
Once you have this deep-rooted understanding, everything, and I mean everything, gets easier.
Once you know your customers, you’ll have a good idea of where to find them. Now you can use your funding to test the channels that reach your customers and judge where your money is best spent to get the best ROI (Return on Investment).
Key to raising further funding will be proof of customers. If you can show a really strong understanding of your customer and tangible interest such as purchases or downloads.
That compiled with knowing how to reach your customer will be enough for you to raise a good seed round. Then you can start thinking about investing further in your product and team as well as ramping up spending on the customer acquisition channels that you know what your ROI will be.
Remember to keep up the customer research. Speak to them constantly, make sure you understand the market shifts and that you’re not getting off focus.
Rishi Chowdhury is the co-founder of IncuBus Ventures, an early-stage startup incubator helping companies find product/market fit, build traction ready for the world’s best accelerators. Originally housed on a renovated London bus, IncuBus now has offices across London – www.incubuslondon.com
Updated – 23 February 2019