WHAT DO WE WANT?
WHERE DO WE GET IT?
FROM THE..…WELL, WAIT…..WE’RE NOT QUITE SURE ACTUALLY OR WE WOULDN’T BE READING THIS!
Right, right—no need to get all angry mob about it.
We all know why we’re here: you’ve already come up with a genius startup company, you’ve got the development wheels in motion, you see a strong future – you just need the capital. Every mom will tell you that stuff doesn’t grow on trees, so where do you look?
Let’s dive right in.
Odds are, you’re already bootstrapping – financing your startup on your own through such crazy principles as watching every dollar, carefully considering the return on investment with every expense, and basically making as much as you can with as little as you can.
Why do it? One word: control. No other hands in the cookie jar means no other bodies at the boardroom table.
But the downside? The sky’s only limit is…your bank account. First time entrepreneurs should probably have a top hat and monocle somewhere in their closet in order to successfully fund it on their own. Costs often exceed what was initially planned for, and things can spiral quickly.
Note: Consider the combo-pack. Get the lean startup principles down while self-funding so that when you eventually achieve outside capital you don’t have a meteoric rise…that ends with a meteoric furniture and gear sale on Craigslist the following year.
2) The Family
Maybe you’ve got a rich uncle, or some of your closest friends grew up to be hedge fund savants – if they’ve got the cash and believe in your idea (or, let’s be honest, if they’ve got the cash and just want to believe in your idea), they may be willing – even excited – to be your first backers.
Why do it? If you do happen to know people with money “to spare,” this is certainly a faster, easier way to get funded. It also gives you experience pitching your early idea to more accepting ears. But keep this in mind, via Nathan Lustig on Fast Company:
All of our investors had net worth of at least $1M or a yearly salary of over $300k. Since they were high net-worth individuals, they could afford to lose their entire investment if we did not succeed, which helped us avoid the mistake of raising money from people who cannot afford to lose it.
But the downside? What Nathan said—your loved ones could be out 100% on the funds they invest in your idea. And as Forbes will tell you, 3 out of every 4 startups reportedly fail, which gives your friends and family a 75% chance of losing that 100%.
So really, this option comes down to how rich they are…and how much they love you. Not an easy gamble.
Generally, angel investors are wealthy folks who invest their own money in startup companies in exchange for equity – but they come in two flavors. Strategic angels are people with industry experience; non-strategic angels are people looking to diversify their portfolios by hopping on the startup gravy train (think Kelso).
Why do it? The fact that angels use their own funds means less red tape, but also less money than venture capitalists – usually $25k-1M (i.e. Seed Capital). They prefer simple terms, and no seat on the board. Strategic angels, many of whom were once entrepreneurs, also offer insight, support, and connections.
…and who should do it? As Ben Horowitz broke it down in Business Insider:
If you are a small team building a product with the hope of “seeing if it takes” (with the implication being that you’ll try something else if it doesn’t), then you don’t need a board or a lot of money and an angel round is likely the best option.
But the downside? While some angels like to invest…and that’s as hands-on as they’ll get, others may use their equity stake as a way to gain power and influence over how your business is run. Angels can also be difficult to find. But even if you win that cookoff and are able to score an angel investor, they’re known to be less likely to reinvest with an unsuccessful company.
4) Venture Capitalists
While Venture Capitalists can play in the angel sandbox, usually they take the stage when it’s time for Series A. The breakdown of the first two rounds goes a little something like this (with a tip of the hat to Elad Gil for helping to make that something make more sense):
• You’ve already figured out your product and user-base.
• You need to build that user-base.
• You’re ready to expand beyond your one geographical market.
• It’s time to work out a clear business model.
• Amounts = $2M-15M
• You’ve already figured out your business model and have traction with users.
• You need to scale that business model (often with a sales team)
• You’re ready to expand cast your market net even wider.
• Occasionally this round will also go into buying other companies that will work with your overall goal.
• Amounts = $7M-10’s of millions
Why do it? VC funding is basically the holy grail. Venture capitalists bring large amounts of money, networking opportunities, engaged business leadership with insight on everything from hiring to taxes, and yet more money if you’ve got further to grow.
But the downside? Many VC firms take their seat at the table very seriously and want to be involved in every major decision, and occasionally even the smaller ones. Funding is also managed on their timeline – the expectation of receiving a lump sum often becomes a reality of rationed amounts based on set goals and milestones being met (which is usually when your tech team lives for weeks on RedBull and power naps).
Yeah, the show ‘Silicon Valley’ kind of has it down – an accelerator is a relative conveyer belt of tech startups, swathed in company t-shirts. The application process is open to anyone, small teams trump individuals, these teams collaborate within their class, and after about 3 months the classes “graduate” with a Demo Day for investors. Wash, rinse, repeat.
Why do it? If you can get in (accelerators like Y Combinator and TechStars accept only 1-3% of applicants), your expenses will be covered so you can focus fully on your work; you’ll have a prime opportunity to kick around ideas with other up-and-coming entrepreneurs; but most importantly, you’ll have A-list mentors who’ve been through it before and have the connections and desire to help you succeed.
But the downside? Again, you’re giving up equity – and this time for a few months’ of help (most take around 5-7%, but some accelerators take as much as 50%). Often you have to move to where the accelerator is, so even if they’re covering your expenses, not everyone can run away for 3 months. Lastly, there are now more than 200 accelerators worldwide – and all are not created equal.
6) Bank Loans
Maybe your startup is SO cutting edge…you want to kick it old school when it comes to funding. There’s a bank for that.
Loans – we all know what they are. In this case you pitch the bank rather than an investor, but you get a boost: the Small Business Association. The SBA offers small business loans that are managed by banks and financial institutions, but…check it…because they’re guaranteed by the government, banks will loan to people they might otherwise have snubbed.
Why do it? Back to that one word: control. No splitting the baby. And for those companies that have just had no luck finding equity funding…cities and towns are oozing with banks.
But the downside? Banks can be very strict when it comes to handing out loans, while at the same time very keen on handing out paperwork. Paperwork that may eat up your evenings with no guarantee of achieving the goal at hand. Still, loans are not impossible to get, but they do need to be paid back—with interest. You also may be required to put up personal collateral (home, first born, etc.).
Yes, there is free money available from the government. BUT – you knew there’d be a but – they are fairly specific. Luckily they are also fairly numerous, and the SBA will help kick off your search. Beyond those state, regional, and minority grants, you may also want to cuddle up to the SBIR/STTR, whose mission is to stimulate technological innovation while meeting federal research and development needs.
Why do it? We repeat—FREE MONEY. But you also get bragging rights for helping to further the country’s cause of innovation…and, man, do investors dig bragging rights.
But the downside? These grants are highly competitive. That’s a). b) is that the ways you’re allowed to use the government’s money are highly specific. As the entrepreneurs at, well, Entrepreneur will tell you:
While the money may be “free,” grants are subject to comprehensive government oversight and audits conducted at least once per year. All grants require the presentation of a business plan that includes a budget, scheduled milestones and project goals that must be completed within the established parameters. It’s common for those who receive grants to hire an accountant or business professional to assist with preparation of the financial reports.
Banks too stuffy, investors too suited, angels too flighty? Well then, have we got an 8th option for you – The People.
Indeed, crowdfunding isn’t just for indie bands and Etsy-esque artists anymore. You can now pitch the masses to not only gain funding for your startup, but to also gain insight into exactly what your audience wants. Sites like Kickstarter, Indiegogo, and Crowdfunder are alive and kicking with people looking to be a part of your big idea.
Why do it? It’s typically easier to get many people to invest smaller amounts than to get a venture capitalist or angel to commit one large amount. Plus, the length of time to fundraise when dealing with anyone, anywhere, on any computer is much shorter than the extended jam dog and pony show necessary to hit up men in suits. You also just may get free publicity and brand awareness thanks to the word-of-mouth factor excited new micro-investors bring to the table.
But the downside? “All-or-Nothing.” aka Most crowdfunding sites only offer you the funds raised IF you reach your initial goal—and if you don’t, you get bupkis. On top of that, should your campaign go south, the evidence of that remains searchable, which could deter future investors. And on top of even that, some investors are leery of investing in a company that already has hundreds or thousands of inexperienced investors already onboard.
So, there you go – the big 8.
Though juuuust in case you need it, there is one hail mary:
9) One-eyed Willy