Eighty-two percent of startups are self-funded, and 41% are funded through loans or lines of credit. But it’s the 1% of startups funded by venture capital that generate the most interest among entrepreneurs. Particularly in the hyperlocal space, where scaling has been an ongoing issue, it can be challenging for founders to overcome skepticism from institutional investors who’ve been burned in the past.
“Startups focused on local will face the ghosts from the past and will be challenged to articulate a plan for tackling a highly fragmented universe,” says Scott Mackley, founder of Yappee, an influencer-centric marketing platform that’s completed an angel seed round and plans on proving its concept with beta users before reaching out for institutional funding.
In order to overcome those challenges and secure funding as a hyperlocal, founders must think strategically—and sometimes get creative, as well. Here are seven strategies for hyperlocals seeking funding, from executives who’ve been there before.
1. Be prepared to face scrutiny. “[As a hyperlocal company], your business case will be met with scrutiny. Do your homework and be ready to demonstrate that what your offering addresses a problem looking for a solution — not the other way around. Communicate the specific space in which you play, and the customers you serve — by size, vertical, geography, etc. — so potential investors can compartmentalize the value you bring and where you fit within the broad hyperlocal space. Be able to illustrate the size your addressable market, its growth trajectory, the number of competitors currently in it, and what piece of the pie you can capture.” (David Dague, Gravy)
2. Show revenue traction. “Local was the buzzword four or five years ago, and there were many attempts at tackling the space. While there were a few success stories, there were many that failed. Institutional investors still have a lot of ‘scar tissue’ from the businesses that didn’t make it, so are somewhat gun-shy. Institutions want to see revenue traction and growth, or at least strong user numbers plus evidence of product and market fit before funding bigger-than-seed rounds.” (Scott Mackley, Yappee)
3. Find investors who can also be advisors. “I would say to find investors that are experienced in the market in which you plan to pilot. [Vendors should] find investors who have worked in similar models—both because they will understand your value proposition, but also because they will also be able to advise you on how and when to scale.” (Bryce Anderson, Lightswitch)
4. Reach into savings. “I’ve taken the strategy of bootstrapping our company. Coming from a family of entrepreneurs, I’ve always been instilled with the idea of building up enough capital through savings or loans, and then starting the business and building it up through good product and great customer service. It’s definitely the non-traditional startup approach these days, especially for software startups in our space. But, so far we’ve been executing well in this fashion.” (David Tien, Spotlyte)
5. Start conversations, not pitches. “In our case, [we found investors] through a series of conversations and not necessarily a pitch. Our founder and one other founding member had frequent conversations with our investors who mentioned that they needed a video product. The founders thought they had the expertise, took initiative and offered to provide it. We’ve gone through several iterations, and our model is completely different than it was, but we got our start through making the right connections and listening to their needs.” (Bryce Anderson, Lightswitch)
6. Focus on personal networks. “I focused on people in my own network which made [securing funding] fairly easy. They are investing in me and my previous experience in building a company. So, it wasn’t so much about diving deep into metrics to convince them as much as it was me making sure anyone interested was clear with regard to the risk of any startup and what would be the passive nature of their participation going forward.” (Scott Mackley, Yappee)
7. Research third-party organizations. “There are third-party groups and organizations that provide anything from advice and mentoring, to connecting with potential investors and even outright funding execution. Some of those include regional venture associations, such as the Mid Atlantic Venture Association, incubator groups, such as Dreamit ventures, accelerators, such as Acceleprise, angel funding investors that provide venture capital investment supporting early stage entrepreneurs, and accredited investment platforms that come at it more from the investor side.” (David Dague, Gravy)
Interviews have been edited for length and clarity.
Stephanie Miles is a senior editor at Street Fight.