So you have this amazing idea. You know what you want to deliver, but you are not completely sure of how you are going to make it happen. How am I going to fund this, you have probably asked yourself. Well, you are not the first and you certainly will not be the last. It is sort of a rite of passage for entrepreneurs.
Whether we like it or not, money plays a huge role in the start-up world.
This is definitely not a one size fits all kind of situation. So here are 5 down-to-earth, reliable ways to fund your business.
1. Angels
No, not divine intervention. Angel investors. Most cities have groups of high net-worth individuals who are usually interested in investing up to a million dollars in small businesses and start-ups. You can use online platforms like Gust to find them. Joining local networking groups is also a good way to find investors that share your ideas and are interested in what you have to offer.
2. Self-fund your Start-up
Did you know that over 90% of start-ups these days are self-funded? Yes, the launch date might get pushed a little, but the advantage is that you own 100% of your business and thus do not give up control. Finding innovative ways to do this that are feasible for the business and feasible for you as an individual, is generally my favorite challenge to help entrepreneurs solve.
3. Crowdfunding
This is a very effective way to fund your start-up, and in the long-run it is also a pretty amazing way to get exposure. There are a lot of different platforms you can join; Kickstarter is definitely the most successful one so far. The way it works is you put up your business idea and you set a target ($), after that, people can start making pledges to either pre-order your product, get a discount, donate, or qualify for a reward. Try not get carried away here as it can be high-risk: companies that prove to do well here often spend a large amount of effort and cash on the campaign between creating videos and other content, driving traffic to the campaign, and the amount of time put in while success is far from guaranteed. It has certainly worked for many, but heed advice as to structuring the campaign before relying on it and putting money into it.
4. Small-Business Grants
These are government funds; the process tends to be long, but it is worth it as you maintain ownership. If you are in the education, medicine, or technology industries, for instance, this might be a good option for you.
5. Friends and Family
This may not be your favorite option, but it is actually one of the primary sources of funds in the early stages (other than personal). The value here is that at the early stages your family and friends are not likely to demand as hefty of a portion of your company as an institutional investor.
The other thing to strategize on this topic, is planning the rounds of funding carefully. The purpose of your first round of funding (referred to as seed stage) is to get you off the ground and ideally prove your business concept. Any of the above options are great for this and it is important to start small at this stage because it is the highest risk stage. Once you have proven your concept, you may be ready to go to VCs. The reason you do not usually first go to VCs is that proving the concept first takes a large amount of risk out of it for your potential investor. This makes it easier to get larger sums from VCs and because it makes it easier, the valuation you are likely to get is going to be better. Optimizing your valuation, amount of capital received, and amount of time that you spend on raising capital can make or break your start-up: seek guidance if you are not familiar with the territory.
Lawrence Brown, MBA, CFA, FSA
Managing Consultant | AngelytiX Consulting