How to fund a prototype for your start-up

It’s quite an adventure to quit your job start your own business. But this decision also comes with a lot of risk. Planning is required, and where the concept is new, it’s best to design a prototype before you jump into the deep end.

To help you get started, we consider how you can fund a prototype – or minimum viable product – so that you have a worthwhile concept to pitch to investors.  

Tip: Taking out a small loan could help you start your dream business – find out more.

How to get funding for your idea

Eerik Oja, CEO and co-founder of Planet42, believes that you should do whatever you must to get funding for your business – as long as it's legal, of course.

“The best type of funding is customer payments, where you provide a product or service in return for funds paid,” says Oja.

This is exactly what the founders of AirbnB did in 2007. Two graduate students set up air mattresses in their apartment, and offered accommodation to strangers. They pushed forward with their concept, and their first customers were the ones who helped them start their business.

Octavius Phukubye, who’s a partner at Sage Software, says you can also save money, or borrow from friends and family, before you get started.  

“Use these funds to build a minimum viable product or prototype, and then approach angel investors with your concept,” says Phukubye.

In the example given above, the founders could have started with little or no budget by borrowing mattresses from their friends and family, rather than purchasing them. On proof of concept, having made a small profit, they could have approached prospective investors. This would also be a good time to pitch an idea to a panel of critics.

“You could also participate in start-up or small business pitching competitions to win small grants,” says Phukubye. In South Africa, there are a number of organisations you can follow to find pitching opportunities:

• StartupNation
• SMESouthAfrica
• StartupGrind

If you want to retain full ownership, however, you may need to explore slightly riskier options. “Taking out a loan is a good way to fund your business – if you’re able to qualify, and you have the cash flow to meet the monthly repayments,” says Oja.

Where substantial investment is required, raising equity to boost the growth of your company may be your only option.

“You need to be very careful when doing this, because equity investors become co-owners of your business. The average equity investor relationship is longer than the average marriage, and it can become about as ugly as a divorce if you choose the wrong partner,” Oja cautions. 

Don’t stop at an idea – make it a reality

“My advice to new entrepreneurs is to just start. Whatever path you choose to follow, the plan will most likely change countless times once reality kicks in,” says Oja.

He explains that the bright side is that you will at least have real-world feedback, not just theoretical scenarios in your head.

“I used to think that start-up founders were people who had these brilliant ideas that guaranteed their success. In reality, even a brilliant idea will go nowhere without execution. You need to get started immediately,” Oja recommends.

If you believe that taking out a loan is the right funding for your business – click here.