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November 5, 2012

So you want an app? Do you self-fund, or raise money?

Have you ever been lying in bed and the next great app idea strikes like lighting? Or maybe you were stuck in traffic (as was the case with me), and the thought popped into your head, wouldn’t it be nice if there was an app that did ­­­­­­­­­­­­­­­­­­__________?

You took your great idea and shared it with friends and family; and unlike the time you told them about your desire to import alpacas because of the tax benefits, they actually got behind this idea. That’s a great idea. I can’t believe no one has thought of that yet. You should build it. Maybe you’ll be the next Instagram.

Embolden by their support, you do a quick Google search and reach out to a few app development companies only to find out that your idea is great, but it’s going to cost 10x what you had originally thought. So now what? You were sure this was going to be the next big thing. If you decide to move forward, then you’ve reached a fork in the road that most other entrepreneurs have been to. Do I try to get the app built on my own, or do I raise capital from friends, family, and acquaintances?

Ideally you’d like to self fund. You don’t have to give up control and since the idea was originally yours, you can make sure that the final product resembles what you had originally intended. Additionally you don’t have to give up any equity in your business, which when you hit it big will hurt if you see a large portion of the payday going to someone else. Finally, if you do choose to raise money down the road cash will become cheaper and cheaper. When your idea is unproven investors want a lot of equity to safe guard their risk; however if you’re already successful, then you’re able to raise a lot more money for a lot less equity.

However, growth is usually far slower when you are self funded, and you may not be able to build the app on your own. When you start talking about Facebook or Foursquare clones (much better though of course), expect that it’ll cost at least six figures. Smart investors will be knowledgeable of the industry and provide you with a lot of support and advice, in addition to the cash. Plus, the investment will allow you the opportunity to hire really great talent that will help you get to market sooner and usually with a much better product.

As you can tell there are a number of different scenarios to consider as you ponder your situation. What is the best path for your idea and your future company? Raising capital can accelerate your growth, facilitate a number of great connections and help you get to market sooner. It will also cause you to give up equity, and take on an investment when it is most expensive (more equity for less cash) than almost any other moment in your businesses life cycle.

If there is a middle ground between these two opposites I’d say it’s the MVP or minimum viable product. See if you can get a working prototype of your idea built within your own budget, to see if it will gain market traction, before spending your cash or your investor’s cash. If the MVP doesn’t take, then you’ve probably saved yourself a lot of time and heartache. If it does succeed, then hopefully you’re either generating cash flow that will help your business grow, or you’ve proved your concept which will help make it easier to raise cash at a more attractive rate, than would otherwise have been possible.

So what’s your preference? Is it better to raise cash or wait and see if you can bootstrap it?

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