Obtaining the necessary funds to help build a startup is a huge challenge, especially if you don’t know where to start. Depending on the stage of your startup, pursing the wrong avenue can mean the difference between a successful raise or wasted time.
Luckily, with the advent of investor marketplaces like AngelList and financial tools like crowdfunding and peer to peer lending, startups have many different options to secure capital for their business. In fact, I believe that it’s easier today to get funding than ever before in the history of humanity! That being said, here are our tips for getting funding for your company.
1. Self-Funding
It’s extremely common in a startup’s early stages for founders or team members to put their own money into the venture. In fact, professional investors have a word for it, “having skin in the game.”
Funding your startup with your own money is the best way to demonstrate to future investors that you’re serious about the venture. Granted, you must have some savings or liquid assets to be able to do it. But, when you put your own money into a project, it shows others that you have faith in your idea and are willing to risk your own hard earned money to establish the company.
Self-funding a company is also the only real way to maintain control in the early stage of the company, aside from crowdfunding. Otherwise, you are going to need to give away equity or take on debt that will impact your bottom line.
2. Crowdfunding
Crowdfunding is a great way for startups to raise funds for creative projects or to gain the initial capital to fund the large scale manufacturing of a new technology product. Since there are several different types of crowdfunding you must choose which model suits you best, like rewards or equity-based crowdfunding. Whichever way you go, crowdfunding is a low risk option for startups that want to get the word out there about their product and also get the funds to make it a reality. At the end of the process, you will also have a pool of early adopters who can provide valuable feedback on your initial prototypes.
Another important point to keep in mind is that crowdfunding allows you to show marketplace adoption to future investors. When investors see that other people are willing to put money into your idea, they are more likely to consider investing in it themselves! Finally, rewards-based crowdfunding is another alternative to maintain control over your business; many artists and companies choose crowdfunding to avoid censorship and maintain their artistic freedom.
3. Angel Investing
Angel investing has been made popular in the public eye with ABC’s hit show, SharkTank. However, it’s always been well-known in the entrepreneurial community as one option for startups that need funds to grow their business and always want the help and mentorship of an experienced investor. Typically, angels will invest anywhere from the seed stage upwards of 1 million. Sometimes, multiple angels are incorporated into a funding round.
Reaching potential investors in your startup can be as simple as networking in the right places with the right people. This means engaging people on social media, through guest blog posts, LinkedIn groups, and the list goes on! As more people hear about your startup and give you positive reviews, the more interested individuals will see the potential advantage of supporting you.
Even though seeking out angel investment is a great early option, it isn’t for everyone. Angels, like VCs, often want a relatively quick return on their investment and may want more control over the direction of the company than you are comfortable with.
If you decide that seeking out an angel investor is right for you, try looking for someone who is participating in the same space as your startup or has had a previous success. Focus on investors that have expertise in your target market, or a perspective that your team currently lacks. Investors want to see you succeed and can be an invaluable resource for advice and mentorship. For a more detailed comparison of crowdfunding and angel investing for startups see this post.
4. Friends and Family
Friends and family are the “fishes” in an otherwise shark-ridden venture capital marketplace. These are the individuals who love you, already know your talents, and would likely support you regardless in whatever it is that you are aspiring to do.
They may seem like great investment partners, but don’t forget that looking to friends and family for a loan or investment also has its benefits and drawbacks. Friends and family often have faith in our ability to succeed, but on the other hand, they may not have any experience to bring to the table (like an angel investor). As nicely summed up on OPEN Forum:
“This is the all-time favorite place for startup funding. The good news is that friends and family will invest because they love and care about the entrepreneur. The bad news is that it’s not a lot of fun to lose their money and may change the long-standing relationship with this person forever.”
The friends and family option can be an easy way to raise funds for your startup, but you should keep in mind that borrowing money from these people can change your relationships with them. It might help to choose family members or friends with some business knowledge and who are aware of the risks of investing. Regardless, it’s important to treat them like professional investors and to lay out all of the risks associated with your company. I would also recommend telling them outright that it’s likely you will lose their money.
5. A Loan
Applying for a business loan is another way to get your startup funded. You can apply for a bank loan or turn to the many peer to peer lending sites that now offer business loans (see here). These platforms offer savings to applicants with good credit by providing an alternative to banks and other middle men. Many peer to peer lending sites have focused on the importance of providing more funding to SMEs, which can help support economic growth.
One word of caution I’d give is that Mark Cuban says it best in the video below: “There is so much uncertainty when starting a business and the one certainty you will have is paying back that loan.”
6. Competitions
Entering in competitions is another way to get funding and publicity for your startup. As Forbes states:
“Perhaps another sign of the growing support of small business startups is the number of contests that encourage innovation by offering a large financial reward. The Amazon Web Services Start-Up Challenge provides annual rewards of $50,000 plus $50,000 in AWS credits to businesses each year. MIT offers rewards of more than $350,000 each year for its pitch, accelerate, and launch contests.”
Startup challenges and competitions can be a low risk option that gets your idea in front of investors where you can potentially win money and other services to help your startup succeed.
If you haven’t already, I’d recommend checking with your alma mater to see if they offer any competitions to undergraduate or graduate students. Typically, universities will over networking sessions leading up to this competition or opportunities to meet successful businessmen who have graduated from that university.
7. Venture Capital
Finally, seeking out venture capital is the last way to generate capital for your business. Unlike other methods of financing, not every company is “venture-capital investible,” meaning that not every company is a good fit or ideal company for a venture capitalist.
Venture capitalists tend to invest in large growing markets, back new technology, compelling founding teams (not usually individual entrepreneurs), and typically invest a minimum of $1 million. In addition, not all venture capital firms seek to participate in the series A firm of a new startup company and instead would prefer to invest alongside other firms at a later funding stage.
For more information, check out this post on the differences between an angel and a VC.
Conclusion
There are numerous methods of financing a new startup venture. All you have to do is decide which one will work best for your unique situation! You can begin by taking a look at the options available to you and then narrowing down the options to the ones that will best help you reach your goals.
Keep in mind that funding the funding you require can be a long process and that you might not be successful at first. Persisting through obstacles, keeping an open mind, and being capable of evaluating your progress are valuable skills that will pay off for your startup in the end.
