There is one ingredient that can make or break a startup business — money!
Once the founders have an idea, they start looking for angel investors or pitching venture capital firms. These choices are great resources for some people, but raising money this way can be a challenge. Typically you will have to give up equity shares to raise the money.
If you want to make fast decisions without a lot of input, you should consider avoiding these equity funding models. In addition, if you continue to raise money, it can contribute to dilution of your shares and you will own less of your company.
Entrepreneurs have quite a few ways for funding their business. Let's review some of the most popular alternative methods of raising capital.
Family and Friends
In the beginning, it may be easier to convince your family and friends to invest in your startup than to convince a traditional investor. An investor is going to be more critical about your business, demand progress updates, and a business plan. A family member potentially will share your vision or plan, and support your efforts all on its own. This can be very valuable when you are trying to get started with your business.
It’s worth noting, private equity and venture capitalists go into these deals with the understanding that they will not get everything back. Family and friends are usually under the impression they will get everything back. Also, if a business fails it can potentially destroy the personal relationships of those who invested.
Small Business loans
The Small Business Administration (SBA) is a government entity that provides assistance to small businesses in the US in a variety of ways, including various loans and grants. At the end of its fiscal year in 2014, the SBA approved nearly 53,000 loans totaling almost $20 billion.
The SBA works through regional offices. Their loan and grant programs are great ways to raise funds without diluting shares and they also offer mentorship programs. Their SCORE program, which stands for services corporations of retired executives, is a great resource for entrepreneurs.
Generally you might pay a little higher interest rate with the SBA, and the money lending programs have their own parameters based on your business plan and your financial numbers.
If you fit the requirements, the SBA can be a great option for fundraising and can end up as an advocate for you and your business. It can take three to six months for funding and it may be a challenge if your vision involves some form of innovation. You may not want to wait that long because others may try to catchup to you.
One of the best ways to fund your startup is by bootstrapping with existing capital and revenue. If you had one round of "Seed" money from family and friends, and supplemented their growth with revenue.
Using revenue won't work for everyone. If an investor gives you money without a second thought on return, you can scale quickly. However, relying on revenue can limit your growth, since you can only grow as fast as your revenue does.
Once your revenue hits a certain number, banks and traditional institutional investors will be more likely to lend to you.
The market wants revenue even if it’s a small amount. You can keep more of your ownership and grow your financing by proving your idea is valuable. However, you may just find it easier than you think to find that angel investor.
Public and Private Grants
One overlooked source of funding for new startups is government and private sector grants. Grants require no equity to obtain and they typically don't require that you pay them back.
For a government grant, it starts with actually finding one, which can exist at different tiers of government, or within an offshoot government program. Once you find a grant and determine that the department has available funds, you must complete a long application process. Also, beware that many government grants only accept applications at certain times of the year. This seems like a lot of work, and it is, but that will probably scare off a lot of competition who aren't willing to put in the hours.
Private sector grants are much easier to find, but typically a lot harder to get. Large corporations are often looking to give back as part of a corporate responsibility effort or to receive benefits of their own. A recommendation is to look up some of the largest banks, insurance companies, and professional service groups to determine if they have any programs you're eligible for.
There is more competition, and sometimes more stringent requirements for revenue and growth, but private grants have their own set of advantages as well. Often times there is an award ceremony or gala which can be a great opportunity for networking and garnering press.
Fund raising can be difficult, especially if you are pursuing alternative channels for money. The main goal is to suggest other options to help you find some of the capital you need to get your business started!
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