Date: 8/23/15

How To Fund Your Startup?

So you came up with an amazing and possibly life changing idea and you’re ready to bring it to life but unfortunately can’t think of ways to hire a team, put together all of the resources and build the ideal platform for zero dollars or less? You also don’t know if you should invest your own money, fundraise money, take out a loan or look for money elsewhere? Well luckily for you many people before you have had this problem and come up with different solutions to this money problem and the various pros and cons for each one. You have many options but the right option for you and your vision simply depends on your needs, the market for your product and how you want to run your new business venture.

Option 1: If you can afford it, Your own personal savings and soon after reinvesting the earnings of the company back into the company.

This is usually referred to as bootstrapping and is, of course, is the ideal situation, especially if you have loads of money lying around or have a full-time job which pays well and you believe in your product wholeheartedly and truly see it taking off within a few months/years. This is even more appealing if you can start off the business on your own without hiring anyone or find a co-founder whose skills complement your own in a way that allows you to operate the whole show without outsourcing or spending any money that isn’t going directly into the product.

The Good: This allows you to keep complete ownership of your business and being able to take it in whichever direction you deem best. It is also the option that provides the most satisfaction, seeing your business/company/product take off and double, triple, quadruple your money month by month. (**fingers crossed**). It also allows you o focus on your company and product instead of spending your time pitching to investors and filling out paper work for banks.

The Bad: If things don’t go according to plan, you could have wasted all of your savings and depleted all of your personal resources, leaving you in the gutter. There will be nothing you can do to recuperate what was spent and you will have to start again from zero. Again, this is a good reason to keep your day job until things really start to take off. Consider yourself a Ssidepreneur or a Nightpreneur. The other negative about this option is that you might also miss out on some of the amazing resources and insight other people that have done this before, i.e. investors, can provide you and your budding company with.

Option 2. Your loved ones, and their loved ones.

Another option might be borrowing money from your family and friends, and maybe their friends and associates as well. This is only a good option if you are well along in your process and your company is already showing signs of success. You should also have a medium to large sized network with a lot of positive relationships and trust and in order to not ruin that network, you have to make sure that you will be able to repay everything you borrow. Reputation and trust are everything and you should never lose anyones. Remember not to burn bridges or lose people’s respect on your path to success. Also, try not to borrow too much as this should only be money to help accelerate your growth until you have investors knocking down your door for the opportunity to work with you, or until you can build a product for a crowdfunding campaign (discussed below).

The Good: If you have great relationships with people that have money to spare, this could be a quick and painless process with a lot of flexibility. It’s also an ego booster to know that the people around you believe in you enough to invest their hard earned cash into your vision, interest-free!

The Bad: There are almost no con’s to this method as long as you keep your promises and use it to effectively grow your business. Again, do not default to this option, only turn to family and friends when your product is already on its path to success and needs that little push to get infant of the eyes of the right people.

Option 3: Loans and Credit Cars( i.e. DEBT)
So what if your friends aren’t rolling in dough and you don’t have money lying around in a safety savings account or in between your mattress? Well, you could turn to banks and either take out a loan or sign up for one of their credit cards. These options not only require you to pay back the money borrowed, but you have to pay it back WITH interest, sometimes 25% interest! Taking that into account, how much do you BELIEVE in your product? Is it worth the risk and the bonus you have to repay the bank? Will your business bring in so much revenue that you will be able to pay this back quickly and then move on and never look at banks again? Be honest with yourself and really think about whether these are good options for your business, your future and ultimately, your bank account.

The Pro’s: Fast money to invest in your business if you can’t get it from elsewhere. Can give you a much-needed boost to the fast track if you don’t have any other options.

The Con’s: This money MUST be repaid with accrued interest and still only provides investment capital without any other benefits.

Option 4: Crowdfunding
Crowdfunding websites like Kickstarter and Indiegogo are great options for testing out the market for your specific product. You get to pitch your idea to the world and see how it responds. A positive response would include small streams of money from your supporters towards your campaign while a negative response would leave you right where you started. All this means is that you have absolutely nothing to lose. If you are a good writer and can relay a story about the use-case for your product, this could be a great option for you. a Crowdfunding campaign also gives you the opportunity to prove yourself to investors and banks. If there was ever any question about the validity and potential product for your marker, a successful Kickstarter campaign would disprove their skepticism.

Pro’s: Crowdfunding can provide insight as to what the market for your product is if there is one and how much people are willing to pay for your product. It can also help you get attention from the right people.

Con’s: Although Kickstarters’ are great, they don’t accurately predict how successful your company will be since many people who pre-order on those platforms are usually early-adopters who want to have the newest and most innovative product and not the average American.

Option 5: Angel Investors
Now there are two types of investors. The first type we are going to discuss is Angel Investors, which are great resources during the seed* stage of a company. Angel investors are men and women with enough money to gamble and play with. As most people with money love to do, they want to put their money to work, and if you’re lucky, they not only want to put their money to work but they also want to invest knowledge and resources into helping other people fulfill their missions while simultaneously making a decent profit. So essentially Angel Investors provide your company with funding in exchange for a share of equity in your business. In order for someone to be a certified Angel Investor s/he must make over a certain amount of money per year or have a net worth of over $1,000,000! This is because investment is risky, especially when dealing with new and unproven business models, and the big man wants to make sure that people putting themselves in risky situations have enough of a cushion to fall back on. There are two ways an angel investor invests, independently or as part of a group of other Angel Investors.

Pro’s: A good Angel Investor will be invested in your company and will provide you with guidance and resources on your way to growing a successful company since their success is in some small way directly tied to your venture’s success.

Con’s: However you may not want an investor to be too involved in your company and since the Angel Investor will now own a piece of it, you will have to learn to deal since it will also be his right. The other worse case scenario is you will have Angel Investors that don’t care to invest anything besides money in your company at all. In that case it’s just “free money” for the time being.

Option 6: Venture Capital Investing
Also known as, ********! Venture capitalists have A LOT of money to play with. Venture Capitalists are sought after because of the funding they are able to provide, their expertise, guidance, connections, seemingly unlimited resources and the exposure they can provide with different media outlets. Great Venture Capitalists have access to the best resources needed to help a company grow and evolve, because of this and their increasing popularity, they are extremely picky about who they invest in. Before going to a Venture Capitalist individual or firm, make sure to have your ducks in order producing some golden eggs in order to entice them into a deal they can’t refuse. Venture Capitalists can help you focus on your business because of their large networks and access to other forms of funding, that way, you don’t have to worry about crowd funding, loans, credit cards or depleting your savings to make your dream come to life.

Pro’s Venture Capitalists only make money once the business goes public or is acquired by another company.

Cons: Because of a large amount of funding, the Venture Capitalist could end up earning a huge part of your business so make sure to really only take what you need in the beginning and to read the contracts and fine print twice over! You also want to make sure you chose a venture capitalist firm whose values align with your own and who you can see yourself maintaining a positive relationship with for years to come. Although you might be excited by the first VC offer you receive, don’t be fooled into signing up for something that will ultimately lead to you losing a lot of control over your business.

Worthy Mentions:
Option 7: SBA Loans, Grants, and Start-Up Competitions
Small business loans are out there and are provided by the government to help people build small businesses and boost the economy. However, the process for applying for one can be lengthy and inefficient as they have very strict qualification guidelines.

Although Grants and Startup Competitions are rare, they do exists, and there are different ones in every part of the country at any given time. Of course, you need to actively seek them out and get creative but I believe in you! Go look for them as they don’t require repayment, you won’t go completely broke or have to borrow money from friends and they won’t take a piece of your company in exchange. Sounds like a win-win to me.

 

Whatever type of funding you decide to go with make sure you are making the right decision. The wrong decision is one made out of fear and desperation. How do you recognize it? Have the thoughts, “If I don’t take this deal I might not get another chance”, “I really just need the money right now, I can deal with the actual people loaning it to me later” or “I don’t have any other choice”, passed through your mind recently? If so, it might be a good idea to take a step back and meditate on the path your life is taking. The right decision comes from a place of knowledge and a designed vision of where you see yourself and your business one, three, five and forty years down the road. Believe in yourself and the things that matter to you wholeheartedly and you will make the best decision to make that vision come alive.

Now go get that money!

 

*seed stage: very early stage/ best time for some growth funding. Investments at this stage support the business until it can generate cash of its own or until it is ready for further investments.

 

author: Madelyn Tavarez