The author’s views are entirely his or her own and do not represent legal advice or council.
The #1 startup killer is improper cash flow management. In this week’s Plan Friday, Brent explains 9 different funding sources so you know your options and don’t run out of capital.
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You have a lot of different options for capital, including bootstrapping, credit cards, business loans, friends & family, crowdfunding, angel investors, venture capital, family offices, and government grants. There are even more, but these are what we’ll focus on today.
Bootstrapping is perhaps the first option that comes to mind: using your own money to fund your startup. One benefit is that you may be more motivated and driven to make your company succeed if your own wallet is on the line, and banks and investors like to see that you have “skin in the game.”
The downside to bootstrapping is obvious: you’ll be counting your pennies for a while. And bootstrapping isn’t for everyone. You have to be great at time management, budgeting, and marketing (or have someone on your team who is).
#2. Credit Cards
Credit cards can supplement bootstrapping, but you run the risk of tanking your credit score and incurring expensive interest. And even if YOU don’t care if you ruin your credit score, banks do--as your score decreases, they could lower your limit, which can kill your cash flow. If you’re going to use credit cards, have a plan to repay your debt and set limits.
#3. Friends & Family
Funding your startup with help from friends and family is fast, easy, and flexible, but it can ruin relationships if things go south. If you’ve ever loaned anyone money and never got it back, you know what I’m talking about. To prevent ruined relationships, explain the risks to your friends and family before they give you any money--make sure they know they may never see a return on their investment. And document any contributions. Ideally, bootstrap first and prove your idea works, then let friends and family join in with small contributions. That way you won’t get uninvited from the family reunion.
Crowdfunding on sites like Kickstarter is appealing--if you have the right product. The Pebble smartwatch raised $30 million from 2 Kickstarter campaigns! But some of these sites have an “all or nothing” approach, so even if you almost hit your goal, you could wind up empty-handed. Crowdfunding is a good choice if you already have a loyal customer base and you just need additional funding.
#5. Small Business Loans
Small business loans are traditionally a key part of startup funding, especially for retailers and restaurants. Unlike investment funding, a loan gives you full control. And unlike bootstrapping, it’s a good way to keep your personal and business finances separate. Some cons are that you have to repay a loan even if your startup fails; loans are capped on your earnings; and you’ll need collateral and a down payment. Before you ask for a business loan, develop a realistic and attainable pro forma financial model in your business plan to help you figure out how to repay it.
#6. Equity Funding
Equity funding, such as angel investment or venture capital, sounds great, because it’s free money, right? Not exactly--you have to give up partial control of your company and part of future earnings. Tech and healthcare companies, for example, often seek equity funding rather than bank loans. Concepts that aren’t easily understood by bankers could be ripe for investors. Just try to imagine 19-year-old Mark Zuckerberg trying to explain Facebook to his local banker.
Angel investors are typically wealthy business-people who can provide guidance and connections. Angel investors invest their own money, and it’s typically less than a million dollars--often between $25,000 and $100,000. Angel investors also usually invest in startups at earlier stages than venture capitalists.
VCs invest someone else’s money, and it’s typically at least $1-2 million. VC firms raise funding rounds from investors, and then the firm decides where to invest the money. Venture capitalists usually want a seat on your board, whereas angel investors might not.
While it may seem like a no-brainer to seek big bucks from a VC firm, keep in mind that they turn down a whopping 98% of companies, and they’re more likely to fund an established business than a startup. Successfully pitching a VC takes a lot of preparation--and even then, you probably won’t get it--so make sure venture capital is the right fit for you, and that you’re established enough, rather than being right out of the gate. VC firms also often specialize in certain industries, so research them carefully before asking to pitch.
#7. Family Offices
Don’t forget family offices. These are private companies that manage money and make investments for super-rich families--we’re talking $10-100 million in assets. Family offices typically like cutting-edge science and tech startups, such as those that tackle disease, poverty, or another social or health issue. In 2017, there were more than 3,000 family offices worldwide, managing assets of about $4 trillion and making 272 investments into startups worldwide.
#8. Government Grants
Finally, government grants may be appealing, but don’t count on them as your primary source of funding. It can be a long and involved process to qualify, and then it could be years before your grant actually comes through. Consider grants a bonus, not a source of funding.
To wrap this up, remember that rejection is inevitable. If you don’t get funding right away, incorporate feedback and stay persistent. A prospect might say no but be able to connect you with someone else who’s a better fit. Keep trying and don’t give up.
Disclaimer: The information in this blog post is intended to be general information; it is not legal or financial advice. Specific legal or financial advice can only be given by a licensed professional with full knowledge of all the facts and circumstances of your situation. Consult with legal and financial experts before making financial investments.
Brent Butler is Masterplans’ founder and CEO.