The 10 most reliable ways to fund a startup
23 October 2014
Posted by: Author: Martin Zwilling
Author: Martin Zwilling (Entrepreneur Magazine)
One of the most frequent questions I get as
a mentor to entrepreneurs is "How do I find the money to start my business?” I
always answer that there isn’t any magic, and contrary to popular myth, nobody
is waiting in the wings to throw money at you just because you have a new and
exciting business idea.
On the other hand, there are many
additional creative options available for starting a business that you might
not find when buying a car, home or other major consumer item.
If you have the urge to be an entrepreneur,
I encourage you to think seriously about each of these, before you zero in on
one or two, and get totally discouraged if those don’t work for you.
Of course, every alternative has advantages
and disadvantages, so any given one may not be available or attractive to you.
For example, professional investors put great priority on your previous
experience in building a business, and they expect to own a portion of the
business equity and control for the funds they do provide. These are tough for
a first-time entrepreneur.
Thus it is always a question of what you
qualify for, and what you are willing to give up, to turn your dream idea into
a viable business. Here is my list of the 10 most common sources of funding
today, in reverse priority sequence, with some rules of thumb to channel your
Seek a bank loan or credit-card line of credit.
In general, this won’t happen for a new
startup unless you have a good credit history or existing assets that you are
willing to put at risk for collateral.
Trade equity or services for startup help.
This is most often called bartering your
skills or something you have for something you need. An example would be
negotiating free office space by agreeing to support the computer systems for
all the other office tenants. Another common example is exchanging equity for
legal and accounting support.
Negotiate an advance from a strategic partner or customer.
Find a major customer, or a complimentary
business, who sees such value in your idea that they are willing to give you an
advance on royalty payments to complete your development. Variations on this
theme include early licensing or white-labeling agreements.
Join a startup incubator or accelerator.
These organisations, such as Y Combinator,
are very popular these days, and are often associated with major universities,
community development organisations, or even large companies. Most provide free
resources to startups, including office facilities and consulting, but many
provide seed funding as well.
Solicit venture-capital investors.
These are professional investors, such as
Accel Partners, who invest institutional money in qualified startups, usually
with a proven business model, ready to scale. They typically look for big
opportunities, needing a couple of million dollars or more, with a proven team.
Look for a warm introduction to make this work.
Apply to local angel-investor groups.
Most metropolitan areas have groups of
local high-net-worth individuals interested in supporting startups, and willing
to syndicate amounts up to a million dollars for qualified startups. Use online
platforms such as Gust to find them, and local networking to find ones that
relate to your industry and passion.
Start a crowd-funding campaign online.
This newest source of funding, where anyone
can participate per theJOBS Act, is exemplified by online sites such as
Kickstarter. Here people make online pledges to your startup during a campaign,
to pre-buy the product for later delivery, give donations or qualify for a
reward, such as a T-shirt.
Request a small-business grant.
These are government funds allocated to
support new technologies and important causes, such as education, medicine and
social needs. A good place to start looking is Grants.gov, which is a
searchable directory of more than 1,000 federal grant programs. The process is
long, but it doesn’t cost you any equity.
Pitch your needs to friends and family.
As a general rule, professional investors
will expect that you have already have commitments from this source to show
your credibility. If your friends and family don’t believe in you, don’t expect
outsiders to jump in. This is the primary source of non-personal funds for very
1. Fund your startup
These days, the costs to start a business
are at an all-time low, and over 90 percent of startups are self funded (also
called bootstrapping). It may take a bit longer to save some money before you
start and grow organically, but the advantage is that you don’t have to give up
any equity or control. Your business is yours alone.
You can see that all of these options
require work and commitment on your part, so there is no magic or free money.
Every funding decision is a complex tradeoff between near-term and longer-term
costs and paybacks, as well as overall ownership and control.
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