Estimated reading time: 7 minutes, 22 seconds. Contains 1474 words
So you’ve had a perfect idea and now you’re ready to go make that idea into the best startup possible. You’ve picked the perfect co-founder, you’ve chosen the right business model - but there’s now one thing slowing you down. Funding. One question often asked to mentors is how to get funding for a startup. There are two models for funding a startup: what costs you in equity, and what costs you in debt. You can consider grants as another, but this is far less common for for-profit businesses.
Grants are more common for nonprofits or charities, but even still for these companies, receiving a grant is hard work. Debt is a form of funding most people are familiar with. This, unfortunately, is money that has to be paid back along with interest accrued over some time. This isn’t necessarily the best idea, however. Credit rates are usually awful and if you don’t have consistent cash flow, you could end up carrying the burden of that debt for many, many years. Equity, however, is offering up a small percentage of your business at market value in exchange for cash. This is how investors typically get involved with companies. Entrepreneurs should still be wary because if more than 50% of the company is given up, you will end up losing control of the company. So how do you get funding for your business?
Realistic Ways to Fund Your Startup:
Incubators or Accelerators
Venture Capital Investors
Family and Friends
Don’t Quit Your Day Job
Bootstrap For as Long as You Can
Typically, this isn’t what startups want to hear. And maybe it’s not a source of funding since you’re just paying for everything with your own hard-earned cash, but this hard to swallow pill may be what you need to accept when it comes to funding your business. In reality, though, it will be even harder to convince someone to take a chance on your business and give you their hard-earned money if even you haven’t done it first. This may mean working past midnight to cover the labor by yourself. Or maybe, building up a good savings for several months of work to give yourself some leeway. A lot of people swear by bootstrapping. Many companies are often founded by people who bootstrap and moonlight to gradually scale their businesses over time. It can end up feeling even more gratifying since you have built the company by hand. This proves you and your company have what it takes to ‘hack it’, therefore making it easier to score funds in the future. Also, you keep all your equity.
Incubators and Accelerators
Some people might believe that these are the same type of programs - they do the same thing, but that isn’t true. The main difference between accelerators and incubators is how the programs are structured. Accelerators usually have a set timeframe where startup companies spend a few weeks to a few months working with mentors to build their business and avoid setbacks. Accelerators start with an application process but can be very picky about who gets let in. Companies in their early stages can typically receive a small seed investment and be given access to a large mentorship network in exchange for a small amount of your company’s equity. At the end of an Accelerator program, you typically see all the companies involved present their pitch at a form of Demo Day. This Demo Day is almost always scouted by tons of media and potential investors.
Incubators begin with a company in the early stages of the company and do not have a set schedule. Incubators can be independent but are typically sponsored by VC Firms, Angel Investors, or major companies. Incubators can have an application process but usually, work with companies that get invited or contacted through a trusted partner. Once accepted into an incubator, startups spend their time networking with other entrepreneurs creating a business plan and discussing intellectual property issues. Incubators can last a few months to over a year, as they are often open-ended. Make sure you know which one better fits your startup at the time. If you are willing to relocate, or how fast/slow your company is growing, and if you’re looking for capital.
Crowdfunding has become a very popular way for startups to receive early funding. Platforms like Kickstarter and Indiegogo have skyrocketed the number of possibilities for companies to get started. Basically, crowdfunding is exactly the way it sounds - a bunch of people backing your company with relatively small amounts of money donations. These platforms are great for initial funding, but can also be a great tool for subsequent funding. Kickstarter does take some work, however, to build a successful campaign.
Venture Capital Investors
Investors are typically wealthy people who invest money into a project in exchange for shares - or equity, but this means they are going to have expectations in how you use their money. Investors, also, expect a return on their investments within a predetermined period, usually after your company goes public or gets sold. There are three main groups of investors: Personal, Venture, and Angel. First, let’s talk about Venture Investors or Venture Capitalists. Venture Capitalists are more experienced investors looking to make large returns. VC’s are very picking about choosing a business to support and will typically dump millions into the business. Because they are dealing with such large amounts of money, they won’t be interested in a business without a good track record and some way to prove their value. Companies that are just starting and looking for their first round of funding probably shouldn't look to VC’s first.
Angel investors are the type of investors a startup company will be looking to first. These investors are looking to exchange equity for tens up to hundreds of thousands of dollars. Angels typically are used to fill the gap between family support and VC Investments. Different from VCs, Angels don’t normally require part-ownership of the company but may request a percentage of return on the investment made. Although, there could come a time where you will see situations of Angels asking for ownership or making management decisions.
Friends and Family
These investors are just that - Friends and Family that hope to invest in your startup. Family and friends and invest just to invest, but typically receive a convertible note for investing. A convertible note is a form of short-term debt that converts into a small amount of equity. A great aspect of convertible notes is that it doesn’t force the company nor the person investing to calculate the value of the company. Sometimes the company might still be just the perfect idea.
A lot of people starting a company seem to be unaware that the government is most likely offering pretty convenient loans or grants. Businesses are a large source of economic growth and governments have it in their best interest to support people looking to start businesses in their area. Governments at every level can have their own loans or grants available, as well. It helps to google what’s going on in your area, from the city, state, and federal level. Right now, President Trump has designated Opportunity Zones that will give you a grant just for putting your workspace in a certain area of a certain city.
Competitions often require a company to operate out of the area, but oftentimes, especially in smaller cities, tend to be less competitive. These are the perfect way to practice your pitch to investors. Typically you don’t lose anything but time, and even if you aren’t chosen, you’ve spread awareness for your business. This work almost always benefits your company in some way, so there is basically no downside.
Keep Your Day Job
This is the least popular option among many, but keeping your day job can help keep a steady inflow of cash to cover any expenses you may have to help you continue living relatively comfortably. Your business will grow slower, but here you will have the time and cash flow to build your company exactly the way you want, with fewer compromises. You can stay true to the vision of your company without having the burden and pressure that comes with paying for your business with no steady cash flow. You may miss a few opportunities, but in the in, you’ve been able to engage with your startup business to get it up and running exactly the way you hoped.
There are many ways to fund your startup. Many of these ways vary by experience level and your company’s track record. Bigwig Investors tend to enjoy startups who have bootstrapped for as long as possible, but when that no longer becomes an option, there are several other great ones. Do what you feel comfortable with and try to consult others before making a move you don’t feel completely comfortable with. But, anyway, good luck and happy funding.