2D: A Model for Financing Incremental Additions to A Post Revenue Application (you can change the word Application with Service or Business if you want).
2 D: Means two disciplines. First discipline is to use other peoples money to fund the iteration. Second discipline is to responsibility to pay the money back, with the short term interest and the long term benefit as a promise at a certain time. (ie no one likes a ‘conman’)
Incremental Additions: This is not to fund your startup idea. This is to fund small additions to your existing startup, basically, to fund the execution of one feature of your start-up, not the whole thing.
Post Revenue: The application has to be earning revenue, even if at a loss. This shows that it has some traction, and concept is being proven.
Your application (service or business) just launched. You have customers/users etc.
You need a bit more cash to keep building your application. You have enough for operations on your own, but you dont have enough to outsource some development aspect, pay for additional software, or launch a marketing campaign to raise the capital you need.
A: Choose the next most important feature you need to implement in your application. This feature must be tied to some important benefit like increasing revenue, increasing customer delight, increasing users etc.
B: Calculate how much is the bare minimum you need to build/buy this feature.
C: Gather 2 – 50 people in a small room. Make a pitch. Show them what you have, what your user numbers/revenue etc is. Ask them to give you small loans.
D. Tell them the interest and the date you will pay back these loans. And then offer them an extra bonus to consider in the long term. For example, offer them 1% of profits when the application makes profits through revenue itself or through a succesfull exit.
So if 50 people, gave you 500 each, you would have 25,000.00 to build the next part of your application.
You would promise them 40% interest in 5 months, meaning you would pay back 35,000.00. ( You would pay them back with an interest of 200)
You would also promise them 1% if you made a profit or you exited by the end of the year. So lets say you made a profit of 40000.00. Then you would pay them an extra 8 by the end of the year.
Now if you sold by 100,000 by the end of year, you would pay them all an extra 800, just for backing you.
Not a bad deal. They can make between 700 – 1500 for a 500 investment, if you exit at 100,000.00. But if you exist at 1000,000, they make much more than that.
In my case, I dont need that much funds. I only need about 5000 – 9000 per extension.
So what I would do is signed them up to a longterm pledge, that they will be loan at me with interest for a term of 12 months, four times. So they basically pledge 2000 per person for a 40% interest repayment, and 1% of profits should I exit or make a profit.