You have a great idea for a startup, and now all you need is money to get it off the ground. Land a venture capitalist, and your startup will become the next Apple or Google, right?
Most startups fail, and venture capitalists won’t even talk to companies until they’re pretty far along in their operations, but there’s still plenty of money for leaders to launch their companies.
The options for funding a startup range from self-funding through venture funding, and can include money from friends and family, small business loans, angel investors, and micro-venture. Almost all business leaders start with bootstrapping, or getting things going with their own money. For nonprofits, a whole different set of rules applies.
“If you can bootstrap your company, which means use your own money, or family money, or money that’s fairly inexpensive to get, that’s the very best choice,” says startup management consultant David Coursey. “Do everything you can to avoid angel funds, if you must, and most particularly the big VC firms because that’s going to be the most expensive money you will ever bring in to your startup.”
Bootstrapping can be hard because it’s not easy persuading potential employees to work for the promise of future equity or the chance to get experience.You’re in the best place if you can start selling or otherwise charging customers for the product or service right away. If customers can figure out what your product does and want to buy it, you have proof of concept, even if you end up needing more money later on to scale, says serial entrepreneur and angel investor Dea Wilson.
Her current startup, Lifograph, attempts to make it easier for leaders in technology to find funding by mapping the connections of those in technology, including funding sources, corporate executives and board members, analysts, and even journalists.
“There’s no better way to finance a business than with customers’ money,” she says. “That’s why they should form a startup, to make money, not to be cool.”
If you self-finance and begin making money through sales, you don’t have to share the money with investors, and you don’t have to pay back interest.
Eventually, though, you may need to expand your business. You may want to buy more equipment, a more prominent shop, or hire more employees, for example. At that point, if you don’t have money saved, you will need to look at additional sources of funding.
Small business loans
Since most startups are small, it would seem that small business associations and bank loans would be a good avenue, but that avenue often isn’t available to startups. For one thing, borrowers will need collateral, which most startups and startup owners don’t have. The other factor is that the process for obtaining loans can take a long time, which startups don’t have either.
“You might expect that the Small Business Association would help you out, but again, that’s a very long and difficult process that many companies, young entrepreneurs especially, aren’t going to be able to avail themselves of,” Coursey said.
Sites like Indiegogo and Kickstarter present a new way to fund companies that can be especially effective for startups. In just a few minutes, entrepreneurs can describe their product, how much they need, and begin a campaign to collect small donations from a large number of donors. Both Indiegogo and Kickstarter have been used to fund nonprofits, as well as profit-based companies. Some crowdfunding sites, such as CauseVox and Causes, are specifically for nonprofits.
This works well, particularly with tangible products, such as electronic hardware in which funders can get an early version of the product. Like direct sales, it gives direct feedback about the viability of the idea.
“It’s non-diluted. You don’t give away part of your company,” Wilson says. “You pre-sell the product and make sure there’s money. If you make money off Kickstarter, you’ve proven your concept.”
What I did for love: family and friends
After you run out of non-diluted funding, you’ll need to begin to try to tap into your first level of diluted funding: dear old mom, your rich uncle, or friends. Beware, though because even though it may not require interest, it almost always comes with some sorts of strings attached. These investors will want to have a say in how the business is run or will want to make sure they at least get their money back.
These are “people who will give you money because they like you, not because they necessarily believe in what you’re doing,” Wilson says. “Lots of people end up having awkward conversations at the Christmas dinner table. Let everyone know there’s no guarantee for a return.”
Angels and venture capitalists
If you need money beyond what’s available through crowdsourcing, and friends and family, and if you can put on a convincing presentation of why your company can make lots of money, you might be able to raise money from the flashier sources: angels and venture capitalists. These firms lend lots of money, and they want it back BIG TIME. Venture capitalists strive to make 10 times the money they’ve invested, Wilson says.
Angels and venture firms gain a stake in your company, and expect to get a return on their investment when you make what’s called an exit, which means your company either gets acquired by a larger company or makes its initial public stock offering (IPO).
Angels are single investors or groups of individuals who give upwards of about $25,000. They don’t expect the 10 times yield that venture firms hope to make. Angels tend to want to have a say in the company’s management, says Anita Motwani, who is currently advising several early-stage San Francisco Bay Area startups.
At the next level are micro-venture capital firms.
“They’re kind of glorified angels,” Motwani says. “There’s more structure.” Often, these will have incubators where several startups can collaborate. Micro VCs lend from about $50,000 to about $1.5 million, she says.
“There’s angels, micro, and then if you still need money, you go venture,” she says, countering the myth of the early-stage venture capitalist who gives seed money and takes the superstar company public. In almost all cases, venture capitalists give money only after a company has already raised money through earlier rounds.
Nonprofits: angels and foundations
If you decide to run your company as a nonprofit, venture capital is not an option because by definition, there’s no return on investment with a nonprofit. However, angel investors are very much in the picture. In this case, it’s caring about the cause and having their name attached that the investors value.
“If you did the nonprofit route, I would definitely start with people who are interested in the cause,” says Motwani. “There’s a ton of money out there, from all the wealthy CEOs who give money to charities.”
In addition to individual investors, corporations often have foundations give money to nonprofits. Obtaining money from them can be similar to obtaining money from venture capitalists inasmuch as your company will need to present its case both in writing and in person. You’ll need to convince the investor of the worthiness of the cause and likelihood of your model to address that need.
So, whether your company is designed to make money or to address a need as a nonprofit, you’ll need to prove its viability, first on your own or through friends and family, and later, if necessary, by persuading angels, foundations, or venture capitalists.Learn More: Click to view related resources.