Despite cutbacks and tight budgets, getting funding for your startup may be easier than ever in today’s connected world. With proliferating sources of alternative funding (both online and off), you just need to know how to take advantage of your resources. Here’s some advice from the experts at OPEN Forum to get you kick-started.
Figure out what you want
The first step toward funding is theoretical: survey the options available to you and determine what kind of investment will be best for your business. Traditionally, entrepreneurs had the choice of bootstrapping or seeking angel investment or venture capital funding to seed their businesses. Nowadays there are more options—but don’t discount the old routes.
“Take a good, hard look at your business plan,” advises Eunjue Lie. “Try to determine how long it will be until your company starts making money. If it’s going to be a while, bootstrapping probably isn’t for you. If you’ve had other successful ventures or a pile of cash stashed away, keep control for yourself and away from outside investors.” Start with these general tips on startup funding. If you do decide to seek outside investment, below are some possible channels to pursue.
Going for an old-school bank loan is always a good option. Before applying, however, be sure to get your figures straight and ask yourself the hard questions that you’ll have to answer during this process. For example, how much is your company worth today? What is your projected revenue for the next five years? Do you have a strong management team? What is the money really for?
If you lack access to the traditional financial services community, you may also want to check out a community development credit union. Elaine Pofeldt suggests that “if your business is located in an area that is underserved by banks, check out the website of the National Federation of Community Development Credit Unions to see if there’s a small business-friendly lender in your community.” Here are some tips on how to get your banker to say yes, and eleven ways to prepare your loan pitch.
What if you just want a small loan, or what if you don’t qualify for bank money? Then social lending may be a better bet. Also known as peer-to-peer lending, this platform allows entrepreneurs to lend and borrow money without going through a bank or another traditional channel. “Social lending offers a way to source funds that is a little more flexible,” Thursday Bram explains. “If, for instance, you need only a few thousand dollars to purchase a piece of equipment or fund an expansion, most social lending sites make it easy to find a lender who can work with you. Even better? You can often get lower interest rates through social lending.” Kiva, the most well-known site in this space, doesn’t even allow lenders to charge interest.
There are many other options as well. Check out P2P Financial, Lending Club, Prosper and Funding Circle in addition to Kiva. “Lending Club’s site says rates start at 6.78 percent APR, while Prosper says they begin at 7.4 percent,” Pofeldt notes. “Your credit score affects your interest rate, so if you’ve been diligent about paying bills on time, you may find the deals on these sites attractive.”
Angels and super angels
Katie Morell recently highlighted the success of Jessica Mah, founder of the startup inDinero and recipient of $1 million dollars in angel funding. Now that’s attractive. “Angel investing involves an external investor who provides advantages such as experienced help, connections to the right people, and most of all, a generous supply of money and capital,” explains Lie. “The price to pay for all these advantages, however, is convertible debt and ownership equity.” Still, angel investments can lead to larger infusions of capital and mergers and acquisitions down the road.
A few years ago, so-called “Super Angels” entered the scene and started drawing attention for being big spenders with broad entrepreneurial interest. “Halfway between traditional angel investors and venture capitalists, super angels combine the traits of both in a way that makes them well-suited to help today’s innovative entrepreneurs,” writes Anita Campbell. She goes on to explain the unique strengths and weaknesses of super angel funding.
Last but not least, you can also turn to the masses. Community-based crowdfunding has become an increasingly popular method of raising money for young startups. By plugging into an entrepreneur’s social network and harnessing the power of the Internet, websites like Kickstarter have allowed businesses to raise money and awareness with speed and ease (and no strings attached). “What’s particularly compelling about Kickstarter is the array of people and projects using the site to raise money for their entrepreneurial endeavors,” says Shira Levine. But you also have to remember that it’s an all-or-nothing affair. If you’re not able to raise your target number, then the money goes to the website.
With so many organizations and businesses vying for attention on this platform, how can you make sure that your venture stands out? “To start, you need to build the best page possible,” advises Levine. “The key to a stellar Kickstarter page is a good video.” You can also incentivize donors “with various rewards based on how much an individual donates.” Spreading the words is perhaps the most crucial aspect of a successful campaign. “Using the gamut of grassroots approaches involving social media and other networking tools are what bring in the eyeballs and checkbooks,” says Levine.
Kickstarter is the most well-known crowdfunding site, but there are many others that provide a similar service and are geared toward a specific niche. Barry Moltz highlights IndieGoGo, “the world’s leading international funding platform.” This secret source of funding allows “entrepreneurs to create a video ‘funding pitch’ on who they are and why their business needs the money. This is similar to Kiva, but it’s not a loan, it’s a donation. While IndieGoGo is not an investor site (contributors do not receive equity ownership), companies offer ‘perks’ in exchange for donations.”
“Each crowdsourced funding site has its own milieu. Some cater to business types while others are focused on artists, musicians and social ventures. In addition to Kickstarter—Appback, Profounder and 33Needs may have the money you're looking for,” writes Pofeldt. See what works best for you, and always do your research. “There are an endless number of resources online to help the entrepreneur learn more about attracting capital and funding such as the Angel Capital Association and SCORE,” says Moltz. Just get started.