You might be familiar with the age-old tips of saving your pennies or the showy pitches from Shark Tank, but you may not be familiar with all the other ways that are available for your startup venture to get funding.
The process of getting funding is no joke. It’s long and oftentimes painful. The runway of funding often dictates the product development, team onboarding, and relative lifetime of the business.
Where do you go when you can’t bootstrap your business anymore (i.e. saving every penny)?
What if you don’t have others willing to invest in you that are close friends or family members?
What do startups use funding for?
Startups allocate funding typically toward several major aspects of the early-stage startup journey:
- Product development
- Legal guidance
- Team growth
With product development, initial funds are often dedicated to making the minimal viable product (MVP) as quickly as possible to get in front of customers.
In the case of a software or SaaS startup, this funding would go toward developers or purchasing the right core infrastructure to support the live environment(s), data storage, and service delivery.
Legal guidance is essential. Take Airbnb for example; What seems like a straightforward business arrangement now, was unheard of at the start. Early customers had a few concerns:
RENTING OUT MY PROPERTY TO STRANGERS? Are you crazy?!
Needless to say, Airbnb had a lot of legal issues to work out early on that made investors extremely reluctant to work with them. Their journey is your motivation. Do your homework early on, be willing to invest in good, sound legal advice from the beginning, and avoid massive fallout from legal settlements down the road. Most all startups need some kind of legal guidance from the beginning.
Finally, allocating funds for team growth in outsourcing and hiring. Outsourcing is usually the name of the game for early startup needs. Hiring is a time-suck, however, it’s important to forecast your team’s growth and hiring needs earlier rather than later.
Read: Don’t hire when you’re cash-strapped or overwhelmed and hire from desperation.
If you’re a solo founder, for example, you can benefit from making early hires like an Operations Manager or Technical Support. You benefit from outsourcing product development and marketing, depending on your strengths.
If you’re a team of co-founders, do a time audit and assess where you need to focus energy before expanding your team further and outsourcing. You can use this time audit exercise here from Alex Charfen’s podcast.
How do startup companies raise funds?
Companies will typically raise capital through several rounds. The initial rounds of funding are pre-seed and seed funding. From there, a company moves into Series A, B, C, and so on.
There are a number of viable options for funding available to startup business owners in pre-seed funding and beyond:
Bootstrapping is generally the most straightforward, no-external-strings attached avenue. You take what money and savings you can from your own pocket to offset costs. You now have skin in the game. In doing so, you attract more attention from investors who know that you are willing to bet on the risk behind your business. They are more willing to bet with you later on.
Bootstrapping looks like tapping into a variety of personal assets. This may include credit lines, such as through a credit card that, ideally, offers cash-back and rewards. Selling stocks and bonds, or trading gold or other precious ores in for “liquid” capital. It may also mean pulling from retirement accounts or tapping into your home equity. With some of these options, it’s best to consult with a financial or tax expert before diving deep into your accounts.
In terms of building a startup within a more regulatory or capital-intense industry, you may need to look at other options on the list to offset some very hefty early costs.
2. Bank loans
See what business loans are available to your company. Check into application requirements from various lenders and see what loan amounts and interest rates are available. For loans, make sure you have a solid business plan put together.
In terms of startups, traditional bank loans are an area of contention. This is based on the fact that startups are associated with higher risk compared to the average small business with an industry-proven business model. Startups focus on innovation and therefore are a difficult bet for banks to make for fear of startup loan-holders defaulting on repayment. However, bank loans offer the bright benefit of allowing founders to retain equity that would otherwise be diluted in investor funding options (detailed below).
As a result, small business microloans are encouraged to apply for small business microloans from a non-profit lender. You can find a list of recommended non-profit lenders here. Microloans from the SBA typically average around $13,000 and go up to $50,000. While these loans are typically less than the desired need for a startup founder or team, they are a valid avenue to offset the early startup investment.
Business crowdfunding is an option that some startups can take to gain obtain money. This means that startup founders can list their idea on crowdfunding platforms like Kickstarter or Indiegogo. Through the capital investment from the greater public, companies can gather the funds they need (minus the platform funding fees and payment processing fees).
There are a number of crowdfunding sites available. The crowdfunding space you pick should be aligned with your industry and business focus. For example, if you are a startup focused on the creative arts, Kickstarter will be your best bet. If you’re a female founder, iFundWomen is a top pick. If in tech, Indiegogo is great, as is SeedInvest if you’re not afraid to give away equity.
An example of a successful startup business crowdfunding campaign is 3Doodler on Kickstarter. 3Doodler is a pen that allows you to create a 3D printing masterpiece as you write and draw. The campaign resulted in 26,457 backers contributing $2,344,134.
Crowdfunding works well for companies that have a defined story to tell with their brand and their market focus is toward consumers directly (B2C). It’s recommended that companies have a thoughtfully-created website, landing page or further resources to guide individuals in understanding their solution. Additionally, it’s encouraged to invest time into PR efforts through places like HARO or Source Bottle.
The ability for crowdfunding should consider and factor in legal guidance before sharing business ideas (intellectual property) with the public. This is especially important when considering patent timelines. As a founder, you should be sure to take appropriate action to protect your intellectual property with trademarks, copyrights, and patents. From there, you can then set in motion a powerful crowdfunding campaign.
4. Angel investors
Angel investors are high net worth individuals who resonate with the business vision and journey and are willing to invest. In return, they may seek equity or convertible debt. Angel investors may or may not be previous entrepreneurs and startup founders themselves.
On that count, business startups can benefit from angel investor funding in terms of finding not only a solid investment opportunity but mentorship as well. An angel investor can act as an advisor and assist with adjusting the course. Like a driving instructor, a great angel investor can lean in and lend support toward pivoting the direction.
Finally, angel investors typically operate individually, invest in a series of startups, and are more apt to invest early in a startup’s lifecycle.
You can start your search by sifting through company teams on LinkedIn to start making connections and creating conversations. Look into companies listed in your industry and local region. Sift through company teams to find advisory and board members. In some cases, individuals will share their investor role in their headlines. Beyond LinkedIn, you can check out Crunchbase.
5. Venture capital
Venture capital funding is an option for companies, typically those that are in later stages. This type of funding is much rarer and is not synonymous with an angel or other outside investment methods.
Venture capital funding occurs through venture capital firms, which arrange capital collectively from banks, government invested funds, university endowment funds, individuals with a high net worth ($5 million or more), and other fund sources. These firms are usually oriented with a certain focus for startups in a certain industry or niche.
Venture capitalists are guided by the desire to make a quicker return on investment, year over year, in exchange for a slice of startup equity. There is no such thing as waiting years for traction and engaged customers or clients. VCs aim to see steady progress through straightforward metrics and innovation-based accounting.
The anticipated returns of VCs are around 20% on an annual basis. This places pressure toward traction, however, a founder doesn’t hurt for needing to repay the amount invested or worry about accumulating interest, as in the case of bank lending or personal credit lines.
When considering VCs, understanding the path requires legwork and the critical decision to be made on trading equity for a massive investment to get the ball rolling. With picking a VC, it’s important to look into potential options and benefits outside of investment. If possible, aim to align with a venture capital firm that offers guidance on customer and product development, and essential later-stage advice.
Additionally, you also want to be comfortable with the rules and guidelines of VC firms. Venture capital investing lends itself to a deeper partnership. It’s subject to requirements that you may or may not agree with, so do research early on this aspect.
In order to connect with venture capital funding opportunities. It’s important to get conversations going. Connect with fellow colleagues and business owners in your niche. See who they know who they would be willing to introduce you.
As with seeking out angel investors, you use the same tactics mentioned above for LinkedIn and Crunchbase. Venture capitalists like to hang out on social media, the same as any of us, and LinkedIn and Twitter are hotspots.
Capital opportunities are available in droves if you know how to enroll others in your vision for your company. There are many options that lend themselves to different perks and negatives that you’ll have to weigh as a founder.
When it comes to funding, opt for what fits the stage of your startup and the resources that you have developed so far in your journey. Leverage the connections in your life and keep conversations flowing. There have been many cases where founders I’ve connected with have found their ideal investment opportunities through a golfing tournament or lunch with a colleague.
The money is out there for your startup.