What Are the Options for Raising Startup Funds?
VC funding and angel investment are only two of the options — and they aren't ideal for most startups. Fortunately, you have plenty of other routes that will lead you to the cash you need to get your new business up and running. Let's take a look at 10 options for raising startup funds.
Funding your startup from your savings account is the least headache-inducing choice. You'll have 100% control over all the decisions you make, without anyone looking over your shoulder. You'll be debt-free, and all the profits will be yours. Additionally, later-stage investors will want to see that you have skin in the game. Bootstrapping at least the first stage of your business is beneficial for many reasons. But you may not have the resources to take your startup very far.
Friends and family who believe in you and your idea are another good source of funding. They will typically let you borrow money at lower interest rates than other investors, and they won't demand as much control. That said, friends and family are just as protective of their money as anyone else, and you may get annoyed with the badgering that often comes with loans from friends and family.
Win yourself some cash and publicity by entering a startup competition. SXSW is only one of many that you try. Here are twenty more to consider. Even if you don't win, you'll have gained an audience and an opportunity to hook future customers.
Crowdfunding is a popular option for those with an existing audience or those with marketing experience. If you run a blog or have a small shop and are looking to expand to multiple locations, for example, crowdfunding may be the perfect solution. There are a few different types of crowdfunding: donation-based, rewards-based, and equity-based.
Donation-based is what it sounds like — donors receive nothing in exchange for their donation, and you're not obligated to pay them back. As you can imagine, unless you're funding a nonprofit startup, this type of crowdfunding is difficult to implement successfully.
With rewards-based crowdfunding, you offer your funders perks in exchange for their contributions. You may offer different rewards at different levels of support, such as a behind-the-scenes video or a discounted first version of the product.
If you choose equity crowdfunding, where funders become shareholders and receive equity in your company, you'll need to carefully review the legal requirements associated with it and be sure to follow them. For example, you'll need to abide by voting requirements and dividend rights.
Depending on what your business offers, you may be able to barter for at least some of what you'll need to start your business. You could barter for professional photography, copywriting, a website, marketing plan, business coaching, etc.
Free funding is available via government grants or private organization grants. If your startup is setting out to make the world a better place in some way, such as through education or medicine, you may be eligible for a grant. Grants do come with significant paperwork, however. You'll need to track exactly how you spent the money and create and file reports. You can learn more about government grants at grants.gov and your local Chamber of Commerce should be able to tell you about available grants from local, private companies.
These organizations typically offer workspace, business coaching and training, networking opportunities, and funding to a group of startups. The incubator or accelerator may or may not take equity in the startups. They're often sponsored by universities and industry organizations. Examples include the Founder Institute, NEXT here in Greenville, and Y Combinator.
Bank loans are difficult for startups to get, but they allow you to keep full control and all the equity in your business. These loans typically come with lots of requirements and regulations, so be sure to do your homework before seeking out a bank loan.
Most venture capital firms only invest in later-stage companies focusing on rapidly-growing markets or new technology. These groups are typically looking to invest a minimum of $1 million. While the money is big, so are the expectations. They typically want fast returns and rapid growth — regardless of what's truly best for you or your business. Venture capitalists also usually demand significant control over companies they're funding, so be sure to take this into consideration.
Angel investors provide mentorship and experienced guidance to specific types of startups along with their funding. While many angel investors want to see some traction before they fund larger amounts, some angel networks will fund $100-300k rounds in exchange for a minority equity stake, often between 10-30%. The real benefit of angel investors over venture capital firms is that they offer invaluable help in the form of expertise in your particular industry or market. They can the offer experience that your team lacks.
No one funding type is right for every startup. You'll want to carefully think through your priorities and goals for your business, and be sure to thoroughly research all the options you're considering. Seeking funding can be intimidating, but it's also the path to growth — whether you're bootstrapping or pursuing some other type of funds.
Want to learn how we help startups think through all the angles of their idea? Ask about our SolutionLab workshops.