There are many ways to raise money for your startup business. Which will you choose?
There is more than one method of doing startup fundraising. It’s about selecting the best one for your venture and where you are at right now. Eventually, you may use and progress through a variety of these methods.
Bank Loans & Credit
The mythical small business loan may not really be an option for most startups. It rarely works out. However, there are other business credit solutions that might.
There are various business lines of credit specialists that have popped up over the past few years. Business credit cards may be relatively easy to secure. Many may start you out with credit lines of $10,000 or more.
If you’ve already had some time in business you may qualify for working capital or merchant advance loans. They may provide $100,000 or more in cash to expand and get to the next level.
Many now very successful entrepreneurs got their companies started by using personal credit. With a strong credit score, you could qualify for new credit cards and personal lines of credit. Sometimes introductory deals will offer 0% interest for as long as 18 months.
This is about as cheap as you can ask for to leverage other people’s capital. When combined, these sources of funding could provide a couple hundred thousand in startup capital. It is risky, but will certainly create urgency in getting results and dollars back in the door.
Equity crowdfunding exploded in popularity with the passing of the JOBS Act. Under several different regulations, startups can raise various amounts of capital from both accredited and non-accredited investors.
There are plenty of crowdfunding platforms to choose from. It’s all about selecting the best for your individual business. For startups, this money is often raised via convertible notes, which enable investors to convert their debt investment into equity at the next funding event.
Before the JOBS Act, crowdfunding began with donation-based funding platforms like Indiegogo and Kickstarter. They shouldn’t be overlooked either. Others have used them to raise millions of dollars in pretty short periods of time.
The advantages of this include gaining visibility, early users and backers, proving product-market fit, and often effectively pre-selling your product. All without having to give up any equity or take on debt.
Friends & Family
Most entrepreneurs start out with at least some funding from their friends, family, and personal connections.
Many hyper-successful companies like Facebook were launched with just $1,000 from sources like this. It can be the easiest money you’ll ever raise, and from the easiest to work with investors. It can get tense if things don’t work out as planned.
Though they’ll also want to know why you didn’t cut them in if it works out and you didn’t offer them this opportunity.
Startup Accelerators & Incubators
The best startup accelerators can offer many benefits to young startups. They force you to focus, surround you with peers and advisors, and introduce you to potential investors. They can also offer added credibility and visibility.
The programs vary widely but can offer up to $120,000 in seed capital to get started and take your venture to the next level in a very short period of time. You may have to apply more than once to get in, but most seem to really appreciate the experience.
Grants & Competitions
Colleges, nonprofits, and government agencies offer a wide variety of grants and business competitions with cash winnings.
They can require a lot of effort to enter and compete in. Yet, in addition to the money, you can gain more credibility and recognition. Be selective and make sure you are going to get a good return on your time.
Still, whether it is $20,000, $100,000 or more, it is really free money in that you don’t have to pay it back or give up equity in your startup.
There are even millions of dollars in federal and local grants in the US for acquiring and redeveloping commercial real estate which could be used to house your company.
Angel Investors & Angel Groups
The next step for most startups is to approach and attract angel investor money. This may come from pitching to individual angel investors, appearing in pitch competitions, or presenting to angel groups. This is still early-stage funding, with smaller checks than VCs will write.
The bulk of the decision to invest in you will rely on your idea and founding team versus the financials expected in later rounds.
Corporations & Strategics
If you’ve been following the Dealmakers Podcast you may have noticed more and more hot startups raising money from corporations, and much earlier than ever before.
This may be a combination of both big companies seeking to control technology and harness the growth and innovation of startups earlier, as well as serial founders realizing they can design their ventures to attract these investors early on.
These are companies that would often be future partners, customers, enterprise users, and potential acquirers.
Talk to your fundraising consultant and think about who the big players are in your industry that could make great strategic investors.
Venture capital firms are usually seen as the holy grail of fundraising sources by entrepreneurs. It means bigger check sizes.
This also means that these institutional investors also typically expect a lot more from the startups they invest in and typically invest later in the game than the others we’ve covered already.
Remember, once you take this money you are really committing to a pending exit. Be sure you’ve got your own M&A advisor to guide you through this process.
You may not be able to fulfill your full vision for your company without accepting investment or merging at some point.
Though there are many benefits of bootstrapping for a period of time. You’ll be able to make your own decisions, have more time freedom and fewer distractions.
Alejandro Cremades is a serial entrepreneur and the author of The Art of Startup Fundraising. With a foreword by ‘Shark Tank‘ star Barbara Corcoran, and published by John Wiley & Sons, the book was named one of the best books for entrepreneurs. The book offers a step-by-step guide to today‘s way of raising money for entrepreneurs.
Most recently, Alejandro built and exited CoFoundersLab which is one of the largest communities of founders online.
Prior to CoFoundersLab, Alejandro worked as a lawyer at King & Spalding where he was involved in one of the biggest investment arbitration cases in history ($113 billion at stake).
Alejandro is an active speaker and has given guest lectures at the Wharton School of Business, Columbia Business School, and at NYU Stern School of Business.
Alejandro has been involved with the JOBS Act since inception and was invited to the White House and the US House of Representatives to provide his stands on the new regulatory changes concerning fundraising online.