Do you want to fund a startup? Read this first.
Funding a startup is one of the most common pursuits entrepreneurs have. First and foremost, it’s important to understand that there aren’t people waiting around to throw money your way just because you’re passionate about a new idea. It will take work to fund your startup.
However, the good news is that there are many more options available for acquiring startup funding than there are available for buying real estate or a vehicle. Any entrepreneur who is dedicated to finding the funds they need to grow their business has many options available to them. Although, before you even considering pursuing funds, there is one very important question you need to ask. Do you even need funding?
Some Startups Don’t Require Funding – Or Won’t Get It
Not every business model requires intensive funding—many can be bootstrapped, meaning any profits made by the company are funneled back into its growth. This also means that if your company doesn’t turn a profit, it will have to shut down. However, bootstrapping allows someone to start a company without having to worry about venture capital control, investor returns or taking on debt.
Deciding to pursue venture backing means that you believe your company needs to grow faster than the typical revenue stream in order to lock down a large market. It also indicates that you wish to go public someday.
Below are some of the businesses and situations that will be difficult to fund with anything beyond credit or personal investment:
- There aren’t any publicly traded companies that do what you do. It’s rare for a startup to create an entirely new type of business. There should be a company being traded that has the same core business model as your startup. Most new startups disrupt an existing business or industry, not create one. Most investors won’t want to back a company that’s unable to reach a high level of revenue.
- You’re building onto another product. Some developers and founders believe that creating features or plugins for existing products is a great way to build a business. They’ll be purchased by that business, or a competitor, and have the cash they dream of. While it can work, it’s more of a gamble than a business decision. What usually happens when a business is based on expanding an existing product is that the company is likely to simply build in that feature themselves.
- Your growth is completely linear. Venture capitalists and any other investors like to see exponential growth. They’d like to put some fuel on a burning fire, not help you light the match. Linear growth is great for a bootstrapped company, but it’s not going to entice any investors.
- It’s only you. You might have a few employees, but if you’re the sole founder it will likely be difficult to secure investments. This is because the investor will be relying solely on you for a return on their investment. What happens when you cross the street just a second too early and walk into a truck? Your company dies with you. Having co-founders also indicates that other people are willing to get behind your idea. Lastly, very few people have the skills required to build a successful business. Bringing in more people means sharing the responsibility.
- No money is being made. Operating a startup is much like churning butter: It takes a significant amount of energy and it will create a certain result. You can safely judge a churner by the production speed and quality of the butter. However, if there’s no butter, you have very little information to evaluate the churner. This applies directly to startups. If you’re going to solicit an investment, you need to be able to show that you can make money.
All of the above points apply directly to soliciting investments from venture capitalists or angel investors. Many entrepreneurs believe these are the best ways to fund a business. While they can be great if secured, there are additional options that give entrepreneurs enhanced flexibility.
Ways to Find Funds for Your Startup
Below are a few effective ways that any startup can use to creatively secure the funds they require. Some of this will only be available to certain types of companies, while others can be used by almost any entrepreneur.
- Pursue a line of credit or bank load. It’s difficult for a new startup to secure this type of loan since there are typically no assets to put up for collateral. However, individuals with excellent credit history may be able to pursue this option. You may even be able receive help from the Small Business Administration to receive funds without normal requirements.
- Barter your services for help. While entrepreneurs tend to focus on cash flow and expenses, as they should, it’s not the only way. Consider bartering your startup’s service or product in exchange for help with your business. For example, you might provide network support in exchange for free office space. You never know what options are available for those who ask.
- Seek out venture capital or angel investors. Is your startup established, showing exponential growth and have a business disrupting model? If so, you might be a perfect candidate for venture capital backing. Typically, these investors are looking for large scale businesses ready to reach the next level. You’ll need a proven team and plan of attack for your funds.
- Try crowdfunding. This is the newest option for investors to pursue and one that’s proven to be effective for some businesses. You create a page highlighting your product or service and people make pledges to back you. In exchange for their backing, they receive a t-shirt or advanced copy of your copy, for example. In exchange, you receive capital to grow your business and even some added publicity.
- Fund it yourself. Starting a business has never been cheaper. Bootstrapped businesses are often self-funded. It will take time to save money for growth, as well as paying your living expenses, but you’ll have complete control over your business and an excellent sense of achievement.
Every entrepreneur deserves a chance to succeed. Explore each of the above options and see which will be perfect for your startup.
Related Story: The top US cities to launch a startup in 2014