The hardest challenge a young entrepreneur will face is raising capital. Convincing someone else to believe in your dream takes resilience, planning and a strong presentation. You could be turned away 50 times before you persuade one investor. Are your goals defined? Does your idea have a definite future? Will it make money?
If you can answer yes to each of these questions, you might be ready to build your future business. But startup funding can range from a few hundred to several million dollars, and each outlet has its pros and cons. What are they, and how can they work for you?
Bootstrapping is the self-funding of your company through stretching resources and finances. In short, you're starting your company with just the money and assets you currently have. This is often the ideal choice as it gives you full control of your business, forces you to produce efficiently and carries no debt or obligation to a third party.
Bootstrapping should always be your first option. Unfortunately, most young entrepreneurs don’t have much in assets or money, and if your idea is complex enough, you'll need to bring in outside sources of capital.
Family donations come from just that, your friends and family. Because of this, they don’t have the paperwork requirements of the other debt-funding outlets, and they are usually your first option outside of yourself. Crowdfunding your inner circle for capital in the form of debt can be a great way to raise funds without giving up equity or control in your company.
These grants awarded by the U.S. government typically involve strict criteria, but do not have to be paid back or require a loss of controlling stake. They are, however, difficult to receive and require an extensive application process. Grants are few and far between and often industry-specific—think clean energy, sustainability, biomedical research and nonprofit.
Business loans are a more traditional debt-based funding route. VC firms and investors take losses, but banks do not. Government-backed loans come with low interest rates, but have strict requirements. Personal loans require good credit, higher interest rates and can be difficult for startups with no track record to qualify for. If you go this route, shop around and compare prices beforehand.
Crowdfunding is the pooling of money from many individuals through either an organization or website to support the startup cost of a specific project or company. Contributions may take on the form of donations as well as trading equity or tangible rewards (i.e., merchandise, exclusives and memorabilia) for capital. If you go the rewards-based route, you also retain much more control of your business. (Kickstarter, Crowdfunder, SoMoLend and AngelList are just a few examples.)
Angel investors are high-wealth individuals who provide startup capital to entrepreneurs in exchange for a percentage of equity in the company. This “seed” money is almost always out of pocket and ranges from a few thousand to a couple hundred thousand or more. Angels typically take on a mentor or advisor roles in the company as well, so it's important that they're knowledgeable about your industry. Angel groups consist of multiple angel investors pooling their money together to invest a significantly larger amount in multiple startups. You can research accredited investors at the Angel Capital Association; be sure to look for those in your own region as well as field.
Venture capitalists, like angel investors, exchange startup capital for equity. VCs focus on later-stage funding, usually exceeding an amount of $2 million in capital. Venture capitalists do not pay out of pocket but rather invest other people’s money in the form of private equity, pensions, etc. Because of this, they generally take on high-risk, high-reward companies, like young technology startups, in hopes of them being sold or reaching an IPO. They also take on much more equity in the company along with influencing important business decisions. VCs deal with big money, so ask yourself, can my business make $100 million?
There are plenty of unorthodox ways to fund your venture, like partnering with an established company and trading exclusiveness or first rights for capital. You can also use other projects to pay for your new startup like creating websites, blogs and other outlets that drive advertising revenue. Some entrepreneurs have successfully pitched reality TV shows and use both the money and exposure to initiate their business. Remember: Investors are looking to make money and if you can potentially turn a profit, they will eventually listen.
These are just some of the traditional ways young startups have raised capital, but don’t limit yourself. As your company grows, your funding needs will change. My recommendation? Always try the bootstrapping route first, and then take on outside funding as it becomes needed—nothing is worse than being locked out of the very company you created.
Raj Abhyanker, CEO of LegalForce, Inc., is an Internet entrepreneur and patent attorney. He enjoys building great new things, in diverse spaces, and has created a number of Internet websites, including Fatdoor/TheDealMap (acquired by Google Inc. in July 2011 for $30 million), LegalForce Trademarkia (an Inc. 500/5000 startup), and MacInsider. He is also a member of the Young Entrepreneur Council (YEC), an invite-only organization comprised of the world's most promising young entrepreneurs.
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