So THIS is How Startups Get Their Funding?
Money to build the business is the number one challenge for most startups. Don’t believe the urban myth that you can sketch your idea on a napkin, and professional investors will throw money at you. In reality, only 3 out of 100 companies who apply are successful with Angels, and the success rate with VCs is even lower. A large percentage of startups never apply to either.
You need to explore more common and more productive approaches for getting your startup moving forward. Of course, every approach has pros and cons. For example, with any outside investment, you give up some ownership and control, and with bootstrapping your growth curve will likely be longer and more organic.
Yet, I find that startup founders often fixate on one or two sources, often to the detriment of their business. Following is my prioritized larger list of sources, with some “rules of thumb” which may save you a lot of time and energy:
- Bootstrapping. Self-funding is the preferred source of cash for your startup – if you can do it. The advantage is no time and effort searching and preparing for the other alternatives, and you don’t have to encumber yourself or give up control of your company. Just don’t quit your day job before your new company is producing revenue.
- Friends and family. After bootstrapping, friends and family are the most common funding sources for early-stage startups. Use this approach before you have a real valuation, a real product, or any real customers. As a rule of thumb, it is a required first step, as outside investors will not normally consider providing any funding until they see “skin in the game” from one of these first two sources.
- Small business grants. This source often gets overlooked, but it should be a major focus these days due to government initiatives on alternative energy and technology. It’s not a quick solution, but state and federal funding agencies do not want ownership or interest payments from your company. Related sources include local business development agencies. You have to be relentless in this pursuit to win.
- Loans or line-of-credit. If your company needs only a temporary or small infusion of cash, you should try for an SBA loan, or a bank line of credit. Many people are afraid to tap into debt sources because they don’t want to be burdened with the debt if the startup fails. However, if you don’t believe in the company enough to place your own credit behind it, why should anyone else?
- Startup incubators. A startup incubator is a company, university, or other organization which provides resources for equity to nurture young companies, helping them to survive and grow during the startup period when they are most vulnerable. These resources would likely include office space, consulting, and even a cash investment.
- Angel investors. If you are looking for $25,000 to $1 million, the next step is to tap into a local angel network. If you don’t know any “high net worth” individuals, use your advisors to find them. Networking is key here, and you need to find an angel who understands your industry and shares your passion.
- Venture capital. As a rule of thumb, don’t try this one in the earlier stages, and don’t try it unless you need more than $1 million. An investment from a venture capital firm is usually expensive, in equity and control. If you go for venture capital, don’t expect a quick fix, so prepare to spend at least six months searching for and closing the deal.
- Bartering services for equity. Bartering technically means exchanging goods or services as a substitute for money. An example would be getting free office space by agreeing to be the property manager for the owner. Exchanging equity for services is worth negotiating with legal counsel, accountants, engineers, and even sales people.
- Partner with distributor or beneficiary. A related company may see the value of your product as complementary to theirs, and be willing to advance funding, which can be repaid when you develop your revenue stream. Consider licensing and “white labeling.”
- Commit to a major customer. Find a customer who would benefit greatly from getting your product first, and be willing to advance you the cost of development. The advantage to the customer is that he will have enough control to make sure it meets his requirements, and will get dedicated support.
Just remember that you don’t get ‘something for nothing’ in any of these cases. All funding decisions represent complex tradeoffs between near-term and long-term costs, ownership, control, and time and effort. Your funding strategy is a key part of every business plan, so don’t hesitate to check out the real alternatives.
|Author(s)||Marty Zwilling (other articles by Marty Zwilling)|
|Original Publication Date||May 30, 2011|
|Related categories||Funding Trends, Raising Capital|
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