Why you shouldn't bring capital into your business

A prototype before an investor was my recommendation in August 2012. Although we had just started Amino Kapital, I thought many entrepreneurs could benefit from getting further with their product before seeking funding.

A prototype before an investor: Make the idea concrete

I suggested describing the project and drawing the main screens and user journeys. That could make it easier to see what a first version needed to do and what could wait.

I was thinking particularly of IT projects, which were what I knew. I wouldn’t build every detail straight away, but would make a small version that actually worked and could be tested.

I used Amino Kapital as an example

I described our first version as very simple. It could bring people seeking capital and people wanting to invest or lend together in one place.

We invited early users in and got some activity before telling a wider audience about the project. I also mentioned discounts and early revenue as part of that historical account.

I already had Amino and could use it to attract visitors. I said another entrepreneur might need longer to make the same progress.

I wanted something to show in the conversation

My point was that a working version and paying customers could make a conversation more concrete than an idea alone. I imagined that could change negotiations over capital and ownership.

The prices, revenue, investor numbers and ownership stakes in the video are my information and illustrative calculations from 2012. They aren’t current price offers or a guarantee of funding. I had my own interest in the Amino services I discussed.

A prototype before an investor: Why I would wait to raise capital

A prototype before an investor was what I recommended to many entrepreneurs. That might seem odd when we had just launched Amino Kapital and brought in nearly fifty investors. You might expect me to spend the whole video selling the new service. But my point in August 2012 was that many people were welcome to use it later. They just needed to get further with their business first.

I often got emails from people with an idea who wanted a bank loan or an investor. They needed to develop the product, pay themselves a salary and market it. My first question was: are you sure you need that money right now? How far can you get without it?

I was talking mainly about IT projects because that was my own field. A typical message said the project couldn’t get started without half a million kroner. I thought that assumption was worth challenging.

An idea alone could cost you a lot of ownership

My experience at the time was that investors generally wanted to see something that worked rather than just an idea. If an investor did believe in you and your idea from the very beginning, that first funding could be expensive in terms of ownership.

I used an example of DKK 250,000 in exchange for half the business. The money could soon be spent, while you had still given away half. It could be a good deal if plenty of other things came with it: a strong network, work from the investor or perhaps a partner who took an active role in the business.

But if you primarily wanted money, I would explore another route. If you already had a job, you could keep it a little longer and pay for a prototype yourself.

Draw the first version before commissioning it

I used around DKK 30,000 as an example of an amount you could try to raise for a first version. I was very blunt and said you could take extra work, deliver newspapers or collect returnable bottles for long enough. I didn’t mean you could build a finished copy of Facebook for that money. I meant thinking it through and cutting an IT project down to a prototype.

The first task was to describe the idea as well as possible. Draw the screens. I mentioned little drawing apps for the iPad and similar options on a computer where you could sketch web pages. The prices of five or ten dollars at the time were just an example. The important thing was to make the idea visible.

Where is the menu? What buttons should there be? What should the user be able to do? If you click here, which page do you go to? Draw that page too. Map out a journey, and perhaps print it out and lay it on the floor so you can see how it connects.

The final version probably wouldn’t look exactly like that. But, as with a business plan, the work gave you a better overview. Even while drawing, you could discover that a feature didn’t fit together or something needed doing differently.

Cut things out rather than inventing more details

You could then use the drawings to ask for quotes, for example on Amino Freelancer. Explain that you want an early version: a demo that actually works and can be expanded later. Show how you imagine the pages and features.

My estimate at the time was that you could find a developer to build a simple prototype in Joomla or WordPress, for example, for ten, fifteen, twenty or thirty thousand kroner, depending on how advanced it needed to be. That was an estimate, not a fixed quote.

But remember that it isn’t the final product. You don’t need to invent every last detail. Cut it down to the absolute essentials so you can see whether the basic idea works.

Amino Kapital itself was a very simple beta

I used our own new project as an example. Amino Kapital had beta written on the site, and the first version could do almost nothing compared with everything you might imagine. There wasn’t even a search box.

An investor could create a listing explaining who they were, what they could contribute and whether they were offering an investment or a loan, for example. You filled in a few things, clicked OK, and the listing went live. On my side, I could edit or delete it.

Conversely, a business could describe the capital it needed and what the project was about. I had also just had a feature built around investors’ industry interests and relevant new projects, which we needed to see would work. That was roughly what the first version could do.

It had cost me around DKK 30,000 by the time I recorded the video around 2 August. That was enough to test the idea. Fortunately, I had other websites, especially Amino, that could send visitors there.

Gather interested people while you build

I recommended creating a website early in the work on the prototype and letting people sign up with their email address. Tell the target audience you’re making something exciting. Then you might have fifty, a hundred or five hundred interested people when you launch, depending on how well you do the work.

When you get tired of working on the prototype itself, you can write copy, talk about the project and build interest. Put something online that Google can find. I also compared collecting email addresses to the way Groupon did it at the time.

I could use Amino’s newsletter. Others would have to work with search engines, Google AdWords, help from friends and family, and mentions online. The point was to bring real people in and test something.

The first listings made the launch more concrete

I mentioned various approximate numbers along the way: around 44 investors after the first week, and later about 45. It was free for investors, so I stressed that the number itself wasn’t an amazing achievement.

For people seeking capital, the listing price at the time was DKK 499. I gave Amino Plus members the chance to join for DKK 10 as a special benefit. Around 25 took up the offer, bringing in the first DKK 250 and some actual listings.

It was important to have content on the site before contacting the press. Journalists needed to see that real businesses were already seeking capital. I described around 25 businesses seeking capital at that point and mentioned various approximate investor numbers along the way. It was an account of the early stages, not a complete audited tally of users.

I had deliberately launched in the middle of the summer holidays, during the silly season. I thought that might make getting publicity easier. Børsen, Jyllands-Posten, Politiken and TV 2’s website were among those I said had covered it, and I had also seen quite a few blog posts.

The publicity brought more activity. I now described around 45 investors and around 45 people seeking capital, and said later applicants had paid the DKK 499. My revenue example was around DKK 12,500 plus VAT coming in against development costs of about DKK 30,000. I hadn’t included my own working time. So that wasn’t the same as the project having made a profit.

Now I had something different to show an investor

I then imagined a conversation if I needed capital for Amino Kapital myself. I could show a beta, listings and the first paying customers. Perhaps DKK 100,000 was needed to finish building it, DKK 100,000 for marketing and another DKK 100,000 for Sweden, for example. That was a hypothetical example, not my actual plans.

How would an investor see that compared with me simply having a fun idea and believing there was a market? I thought there was a big difference. I had shown that the product could be used and that someone would pay. That was what I called proving the concept.

I also knew Amino gave me a head start. Something I had done in a few days or a week might take someone else six months. But that didn’t change the order: build something, get people to use it and generate some revenue.

In my hypothetical negotiation examples, DKK 250,000 might then cost ten, fifteen or twenty per cent rather than half. The figures were illustrative. My point was that experience, a working product and customers could change the starting point for the conversation.

Seek funding when you know what it needs to accelerate

At the end, I admitted that of course you had also heard plenty about Amino Kapital, which I wanted you to look at. But I didn’t just want to say everyone should use the service immediately.

I was pleased that many projects on the site were already running and generating revenue. That was the order I recommended: make a prototype, generate a little revenue, and then consider capital to market and develop something already showing signs of life. I believed that put you in a better position and let you retain more ownership and influence. Those were my experiences and expectations in 2012. You can find more of my experiences of building a business in Iværksætter til jeg dør.

Read also about how I launched a project in small steps.

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