The question that interests most startup founders is “How do I find investors for my idea?”. We’re not investors, but having provided UX design services to a number of startups, we know one thing: finding investors is easier than convincing them to invest in your product. Here is how investors answer this question on Quora:
We are more optimistic, though. Everything is possible when you can show investors more than just a great idea. Today’s story is about how you can use a prototype to fund your startup. Understanding the benefits of prototype brings founders closer to understanding investors.
Three reasons why you need a prototype to secure funding
Every startup founder tries to find out what investors really want. We’re not in the position of knowing all their motivation — but what we do know is that investors want to be sure that the startup's idea will turn into a product and set to the market. That’s why they are less likely to support founders that have nothing more than a great idea.
That is not to say that idea is not important: surely it can impress investors. But when the founders show that they have already done some work on the product, the investors would be even more impressed. It is a sign that the project is serious and their money won’t be wasted (there have been sooo many cases of founders spending money without delivering any result, even though venture capitalists (VCs) are not very willing to talk about that).
The amount of work that has to be done differs depending on every stage of funding. At the seed stage, for instance, investors expect to see a prototype, at series A and later, some revenue and good financial and marketing KPIs are a must. Today, we will talk about prototypes and the seed stage. However, having some kind of prototype at the pre-seed stage would significantly increase the chances of getting the funding.
No need to understand human psychology well to know that it is better to see once than hear ten times. Investors may rather rationalize the reasons behind their choices and say that KPIs and business plans are more important than the look of the app. But it’s a fact that a good pitch and a good-looking prototype have a big influence on the final decision.
Another reason to prepare a prototype is copyright issues. If you have a unique idea that is not yet copyrighted (or is not subject to copyright yet), there is always a possibility that someone would appropriate it and get it to the market earlier with another team. Many people say it’s a myth, while others say it happens for real. It’s always better to be cautious.
Does the prototype need a good design?
You wouldn’t expect an objective answer from a UX design company, right? But to be honest, we have to admit that getting funding at the seed stage without a good prototype design is possible. Because we are optimists and we believe that everything is possible. If we rely on our own experience, on the other hand, we’ve done some good design for startups and they got funding. Nobody knows if they would have gotten it without that good look.
If you got lucky at the seed stage with a meager design, getting through series A with the same would be much harder. Good design has a big impact on the success of the company. And these are not just the opinion of a design agency — you can see real stats proving the value of great design.
In recent years, some experts have noticed that getting seed funding from VCs is becoming harder and harder. Be it instability in the world economy or some other shift, the result is that many people look for other sources of funding, such as bootstrapping or crowdfunding.
Is it a good idea to crowdfund a SaaS product?
On the one hand, SaaS products are a good fit for crowdfunding. Apart from raising funds, the benefits include the audience of potential users who would be willing to test the product and give feedback. However, we can say that crowdfunding is not the most popular funding method for SaaS startups.
First of all, let’s split through different kinds of crowdfunding. There are three types that can be used for a startup:
Donation-based — people pledge because they believe in the product and genuinely want to support it. Would suit projects with strong social impact, but wouldn’t work for most typical SaaS. GoFundMe is an example.
Reward-based — classical crowdfunding platforms, where backers are offered rewards depending on the size of the donation. For $10 you get a thank you, for $20 you get a thank you mention on the website, and for $30 you get a thank-you letter in your mailbox. Works best for physical products and art projects, however, the software is also accepted. The most popular are Kickstarter and IndieGoGo.
Equity-based — this kind of platform is better adapted to startups in comparison to the rewards crowdfunding, which suits art projects and material projects best. It suggests people to support a product and get some equity in return. Basically, it is crowd-investing, only instead of having one investor or a VC firm, you can get a huge number of small investors. Examples: SeedInvest and Fundable.
Let’s start with classical rewards and donations crowdfunding. On Kickstarter, one of the most popular crowdfunding platforms, the software makes less than 1% of all funded projects. Is it because fewer projects are applying or because it is hard to succeed? We don’t know. The only thing we can say is that there were successful cases of apps funded through crowdfunding platforms and you can be one of them, too. Some examples are 4Privacy, Zero Codes Ypsilon, and Momentum Planner.
Why do people still go for crowdfunding? It is a good way of raising money while maintaining control over the business, and testing the idea: would people be willing to pay for such a service? Some startups prefer crowdfunding because it fits their values.
Now, let’s try answering some other questions related to prototypes and funding.
Is there a need for a prototype for crowdfunding?
To publish a project on equity crowdfunding platforms such as SeedInvest, startups have to go through a strict selection. The amounts raised are much higher than on rewards-based platforms, and therefore a stronger control is necessary. The minimum amount is $500,000 and the investors’ risk is much bigger. Also, for B2B startups equity-based crowdfunding is way more feasible than other types.
To be accepted at SeedInvest or a similar platform, an MVP or a prototype is required. At the same time, not all of the products show what it looks like on their page. It’s more common to see a data-heavy pitch deck than mockups. People who invest thousands of dollars are interested in numbers. And the job of checking the amount of effort invested in the project is done by SeedInvest during selection.
However, seeing images or a video showing a working prototype makes the product page way more attractive. Just by looking at the first page of SeedInvest we can see that products with well-designed prototypes have raised more funds than those without. Coincidence or not?
Here is an example: a mockup-proof photo from Flextal, a hiring platform.
The rules of Kickstarter clearly state that products need to have a functional prototype to be listed on the platform. They have a history of projects who promised wonderful new technology, gathered millions of dollars, and only after realized that the product would cost a few times more than expected.
It is even prohibited to use photorealistic renders of the products, so that backers wouldn’t be fooled. Still, the crowdfunding model involves a large percentage of the risk. Around 10% of the projects fail to deliver the result.
So, how does Kickstarter check if the prototypes are functional? They don’t. Only if the project looks suspicious or somebody reports it, it can be suspended or removed from the platform. It is more important for material products, while with software projects the rules are softer. When presenting startups on Kickstarter, many just upload images or videos where you can’t tell if that is a mockup or a prototype. As a result, it may look better on the page, but has less practical value behind it.
People pledging $50 to get a subscription in the future like to see how it would work. Pitch decks will not interest them much. Here is an example of a good prototype gif by VGC Illustration, a drawing app.
We’re focusing on prototypes in this article, but keep in mind that crowdsourcing platforms require a lot of effort to succeed. If you are not ready to communicate with the investors or adhere to the deadlines, think of other funding sources. Otherwise, you’ll get into one of those 10% of projects that don’t deliver the result and disappoint the backers.
How to make your prototype appealing to secure funding?
If we were in a workbook for startup founders, we would say that prototypes are the fruit of a design process that starts with empathy and user research, and goes through some iterations before the development has even started. But we are not a workbook and startups often tend to be messy and spontaneous environments that follow their own processes — and that’s their strength.
So, we’ll just tell a story of how we built a prototype for a company that needed it to secure funding. Tromzo, a code security app, came to us for their first prototype. The founders were developers themselves. The empathy stage was done internally and they already had a code prepared.
Developers explained to our designers how the app should work and translated back-end code into front-end. We had little time to make the prototype. User testing was not necessary, so we focused on the visualization of the main screens. Here is the dashboard (it used to be called Polaris back then).
The design was minimal, but usable. The founders helped us to understand what the UX design for developers tools should be. If you are curious to learn more about the process, read the full case study.
To make a long story short, Tromzo successfully got funded after building a prototype. Now they are at the next stage, added new features and the design evolved as well — here is how it looks now.
Prototypes should be taken as the first draft version and are subject to a lot of alterations when the product grows.
The secret ingredient to a prototype that appeals to the investors
If you want a piece of advice on how to make a product prototype that would shine on your pitch deck or a crowdsourcing page, here it is: focus on the main and cut out all the rest. When you are looking for early stages funding, time is precious.
And from our side, we assure you that design is not one of those things that can be cut out — even at the early prototype stage. Contact our professionals to get a consultation on where to start!