One of the most common questions for first-time entrepreneurs is how they can go about funding their startup costs. This is an important question to ask of course. There’s a lot of media coverage on large venture capital injections or angel investments on popular shows like SharkTank. However, not every business is suitable for VC funding or can make it through the competitive TV casting process to pitch famous entrepreneurs. This article will highlight some tried-and-true funding methods as well as more creative ways to try and secure your capital.
A good practice in general, whether you will be able to secure funding or not is to operate as lean as possible. Although the term bootstrapping in relation to startups is relatively new it’s not a new practice. Sweat equity goes a long way and it can help you get your business off the ground without much capital in some instances.
Whether you come up with your own branding or forgo an office and work from home there are ways to reduce startup costs. If you are struggling to secure any funding whether that’s in the form of debt or equity, bootstrap your business to prove your business case and then go after funding again.
Friends & Family
It’s difficult to convince a stranger to invest in you. It’s no surprise entrepreneurs often turn to friends and family as a first or last resort in their funding efforts. Many successful businesses have been funded this way.
Having said that it’s important both parties understand the risk involved. Can this family member or friend afford to lose the invested amount should the business fail? How would this impact your relationship? These are important questions to answer before exploring this path.
Securing a bank loan for your startup isn’t as easy many thinks. Gone are the days of walking into your bank, pitching your business and getting approved based on your credibility in your local community. Business loans are typically tied to personal collateral.
If you have a home, summer cottage or any other asset you are willing to put up as collateral this is certainly a viable and fast route to secure funds. Again, it is important to keep in mind that you may lose the secured asset should your business go belly up.
Credit cards are one of the most common ways to fund new businesses, especially for small businesses than don’t require more than $10,000. Credit cards are a great option because you’d get access to capital quickly.
Having said it’s important to stress the point that you are taking on debt that you are personally liable for. Of course, every entrepreneur is optimistic starting out but there’s a real chance the business might not work out.
Now that we have covered some of the more traditional debt-related funding routes it’s time to look at equity-based methods. Angel investors are typically successful entrepreneurs themselves or established business people who are willing to invest in early-stage startups in hopes of getting better than market returns.
Many cities have angel investment networks that meet regularly and hear business pitches. Prepare your pitch and start networking with angel investors in your town. The trick is to find the right investor who’s knowledgeable in your industry. Of course, you’ll give up equity in return for the investment but you’ll also gain an experienced partner.
Venture Capitalists are the big brothers and sisters to angel investors. Venture capital deals typically cover anything from seed round all the way to Series D and beyond. Securing funding from a venture capital fund is difficult to achieve and a lot of factors come into play.
To increase your odds, find funds that specialize in your industry, nail your elevator pitch and presentation, check and double-check your numbers and start pitching. Startup executives often spend months presenting to different funds before they finally secure a deal. One thing to keep in mind you’ll most likely end up giving up quite a bit of equity but you’ll also gain access to their vast network of contacts and expertise.
If personal debt or equity partners aren’t working out for you crowdfunding might be the way. Crowdfunding, a more recent phenomenon, allows entrepreneurs to fund their business through many small contributions. You can either structure this as a rewards-based deal where backers receive something in return like product/service, recognition, etc., or you can give up equity to each backer.
Crowdfunding is a great way for small businesses, especially in the creative niches, to secure funding whereas they might have struggled with the more traditional channels.
If you are a tech entrepreneur willing to relocate a seed accelerator might be a great option. There are several famous seed accelerators like Y Combinator but many more are springing up all across the globe. These are intensive and immersive startup workshops that come with equity investment. Although they are very competitive to get into it’s a worthwhile option exploring.
Government Grants & Loans
Depending on your business and background you might be able to secure interest-free business loans or even grants. Small businesses are the backbone of the economy and government injects a lot of capital to entice entrepreneurs to launch and grow businesses. There are countless grants, loans and tax credits available ranging from payroll tax reduction to tradeshow funding.
It’s good practice to get familiar with your local government’s offerings even if you have already been able to secure funds another way. You and your business might be able to qualify for one or multiple of these initiatives.
Your ability to raise capital often determines if your business will get off the ground or not. It’s no easy feat and requires some creative thinking. Whether you go after equity, debt or a combination you need to be prepared. If you do your homework ahead of time and write a well-researched business plan and pitch deck you’ll increase your odds of success. There are other ways to fund your business but the options listed above are a good starting point to send you on your funding journey.