Money bags to fund your startup?
One of the toughest questions I had to face when starting my first business was “how in the world will I find the money to fund my startup needs?”
If you’re making the leap into small business — business plan in hand, rollout strategy figured out — you’ve probably been thinking a lot about this. You may have tried a few angles already. If you’re still stuck, don’t worry — this is commonly one of the biggest hurdles in a young business’s life.
Venture capital?
You may have considered contacting a dozen venture capitalists. Depending on your business, it’s not impossible you may succeed there. But today most investors are looking for very narrow categories, and they almost always prefer to jump on a speedboat that’s already well underway — so even if your end-game is to attract investors, you may still need to launch your boat off the dock first.
Keep moving forward! There are lots of creative ways to fund a business.
Consider the risks
All of them involve risk, I’m afraid … you knew that, right? I’ll throw down a few ideas below, which may spark your ideas. That should lead you to do more research. Consider each idea given your specific business plan; map out the pros and cons, the risks, the possible paths to recoupment and profitability.
Inviting others in to provide funding requires that you’re willing to give up more control. Maintaining total control is going to require more risk to your personal finances. You need to decide which funding plan is most likely to move you toward your main goal — the one goal you cannot give up — while hewing as closely as possible to your sub-goals and preferences.
Make a Funding Plan A, B and C. You may need to execute all three plans at once, even if one is a backup to the others. Be ready to deal with setbacks and even losses — at least temporarily.
What are your options?
Your business must be funded. Here are several options to consider:
Use your personal fortune. I suppose “fortune” is the wrong word, or you wouldn’t be reading this blog. But in many cases, you may not need that much money to get your startup started. Keep your day job for now, or for a small boost in extra cash start a small-profit business on the side like selling services piecemeal, selling an early subset of your products on eBay, or starting an entirely different part-time business. These days you can do an enormous amount of business, communication and marketing for very little cost, because of the internet and the consumerization of advanced technology. Most startups are self-funded early on, and it doesn’t hurt to get your brand organized, and see how far you can take the business before you really need more funding — the farther you get, the less equity you’ll have to give up later.
Ask family and friends. If you’re rolling your eyes, be aware a majority of startups do begin life with only personal funds and investments from family and friends. After all, if your family doesn’t think your plan is viable, why would a stranger think so? Even if you can only garner a very small amount of help, it’s worth taking this step as a show of commitment, and to test and practice your pitch to other investors.
Apply for a bank loan or credit-card. It can be hard for a startup to get a business loan, but if you have a good credit history or assets you can put up as collateral, it’s possible. Some entrepreneurs are uncomfortable mortgaging their house to fund their business — but if you feel your plan will profit and you hope others will invest in it, mightn’t you be willing to do the same? You should also research loans and grants through the US Small Business Administration — and use the wide variety other resources and tools they have to help you plan and launch your business.
Trade your services, or a share of product sales. If you need goods, services and rental space with which to run your business, perhaps people who provide these goods and services need something you can offer. If you’re an accountant or other business service, can you offer your services to a building tenant in exchange for sharing their office space? If you’re starting a solar panel installation company, maybe the landlord would reduce your rent in exchange for solar panel installation on the building. Or if your bakery is opening in a building with other tenants, maybe the landlord trusts you’ll be selling lots of muffins and is willing to take a portion of your profits as part of your rent.
Crowd-funding. Yes, regular people will donate small amounts of money to help you start your business — if they think your product is a benefit to them, and is likely to succeed. In return they’ll expect a discount or advance access to your product, or special premium tchotchkes nobody else gets, or some other appreciation you can give them for stepping up early. Crowd-funding is hot, but it is crowded with competition — so research successful campaigns to see how they pitched their business, and be sure your path to success really is clear. There are lots of crowd-funding platforms, each with different strengths, including Indiegogo, Kickstarter, RocketHub, FundAnything and Fundable — look them over carefully before you design your campaign.
Make an advance profit-sharing deal with a strategic customer. Have you developed a software platform other businesses will use to deliver service to their customers, or a manufactured product others will sell through their outlets or re-label with their own brand? If you can convince one of these future partners of the value of your product, you may be able to negotiate an advance on the profits they expect to earn from your product. In exchange for the advance, you can reduce the cost to the customer in lieu of interest on their advance.
Apply to a startup incubator or seed accelerator. Incubators and accelerators like Founder Collective, DreamItVentures, or LaunchBox Digital offer either free resources like office space, shared equipment and expertise, or small investments of $10,000 to $100,000 or more in exchange for a small equity stake, or both.
Apply for a small-business grant. Depending on your service or product — especially if your organization’s objective benefits health, education, or other critical social needs — there may be government grants available. One advantage of a grant is that it’s basically free money, not a loan to pay back or an investment for which you must trade away part of your business. But be aware the specifications for each grant are very narrow, so finding a grant that fits your plans, for which you’ll qualify, can be an arduous process. But an initial search of thousands of federal grants at grants.gov can give you a quick idea of what’s possible and is actually sort of fun.
Apply to angel investors in your region. Individual investors with liquidity in your area are often interested in supporting startups. The local connection may get you in the door where a pitch to a larger VC firm may not. You can’t look investors up in the yellow pages, but luckily there are several tools on the web designed to help startups and angels connect. Start your research at AngelList, Funders Club, Gust or Seed Invest — search for the ones already passionate about your industry.
If you have another unusual funding scheme or a success story, please let me know — I’d love to share your experience with other startups!
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Who is John Paulsen? A former small-business leader myself, I feel your pain (and joy) and hope you’ll enjoy the blog. I launched and ran a well-regarded production company in San Francisco with a team of 9 brilliant, hard working people. I learned to manage a wide array of tasks a small business must handle — business strategy, facilities design, HR, payroll, taxes, marketing, all the way down to choosing telecom equipment and spec’ing a server system to help my team collaborate in real-time on dense media projects from multiple production rooms. I’ve partnered with and learned from dozens of small business owners.
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