It’s estimated that about nine out of ten startups fail with a lack of or misuse of capital being a driving factor in these failures. While it’s daunting, do not let this statistic deter you from launching that dream business of yours.
Luckily for you, successful entrepreneurs have shared their journeys with the rest of us so we can avoid the same mistakes they’ve made. The majority of businesses take the time to generate revenue and even longer to generate profits. This makes some form of financing absolutely imperative, especially for new startups.
Since every business is different and likely requires different levels of financing, it’s difficult to know which option is best for you. The financing landscape has grown over the last several years beyond traditional venture capital. With more options than ever before, you’ll need to carefully evaluate which form of funding works best for your business. Here are some of the best financing options for your business.
- Bootstrap Your Startup
Bootstrapping should be on the top of your list when it comes to funding your startup. Since early stage investments by angels or other investors are the riskiest, they will take the most equity at this time. This makes bootstrapping an extremely valuable strategy in the long run.
Bootstrapping is often confused with self-financing. While they are related, self-financing simply refers to putting your own money into the business. Bootstrapping refers to a self-starting process where an entrepreneur is able to proceed without any external input. Whether it’s their own funding, skills, or connections they’ll find a way.
First look at your current assets, namely your liquid cash, real estate, vehicles, and other investments. Take a careful look at your personal finances and decide on an amount you’d be willing to part with or even borrow. It’s very important that you are disciplined and do your best not to exceed your calculated investment. In the event that you lose every penny, you need to make sure you’re financially protected.
Next, carefully examine what resources you have access to that can help jumpstart your business. For example, you should use your home as your office until you can truly afford your own office space. Additionally, you should surround yourself with a team that’s willing to buy into the grand vision of your business. Your core team should expect to defer a salary for months or even a year while they build the business. Give your team equity so they are incentivized to create lasting value for your business.
Lastly, you should stick to an area of business that you are generally familiar with. For example, if you aren’t well versed in finances, don’t try and jump into the FinTech industry. If you have skills and connections in a specific industry it’s best to stick to that industry. Good connections will get a lot done for your company for little to no cash.
Remember, being an entrepreneur is all about doing whatever it takes to progress. Bootstrapping a start-up is a great way to put your entrepreneurial spirit to the test, and you’ll retain a lot of ownership doing so.
Over the last few years, crowdfunding has become a popular alternative for financing projects and businesses. The greatest part about crowdfunding is that it provides much more than just capital.
Here’s how it works:
An entrepreneur will create a project on a crowdfunding platform. The two most popular platforms are Kickstarter and Indiegogo. The project will include the funding goal, information about the business, and ways individuals can “invest” or contribute. If the goal is reached, the entrepreneur will receive the pledged funds less the platform’s fee. It’s now their job to deliver the goods.
Crowdfunding is a great strategy for a few reasons. First off, there’s virtually no barrier to entry. As long as you have a well-developed idea and can clearly convey your message, you’re good to go. In addition, you are receiving both capital and a ton of early adopters. Every user who pledges to your project is essentially an early evangelist. Crowdfunding is one of the only financing options that allows you to acquire both capital and users at the same time.
- Friends and Family
Your friends and family are the ones who will invest in you regardless of market validation, revenues, or hard assets. This is a great strategy to pursue if you’re looking for a small amount of cash to get the ball rolling.
The best way to structure a deal in a friends and family round is through promissory notes. These notes will convert to equity at a rate that is later determined by investors. To sweeten the deal, you can give your friends and family the option to buy at a discounted rate. Since they took the biggest risk investing in your early on, they should be rewarded.
Try not to raise too much capital this way, since it could potential damage your personal relationships. While it may make some friends and family very happy it could very easily go the other way. Depending on how many invest in the round, try and keep it in the $20,000 – $50,000 range.
- Angel Investors
Consider an angel investor as your friendly venture capitalist. Angels are typically individuals with a surplus of cash who are looking to invest in the next hot startup. Since angel investment is typically sought after in early stage companies, they tend to ask for larger portions of the company for less money. Unlike a venture capitalist, the average angel investment is $25,000 – $100,000. Again, they are taking the highest risk, so they’ll demand the largest upside.
The good news is if you secure an investment from an Angel they now have some “skin in the game”. This means they’ll do whatever it takes to try and make your company as successful as possible. Make sure you seek individuals who are well versed and connected in your specific industry. Here are a few things that angels look for in a company.
- Quality, committed, and passionate founders who truly believe in their product or service.
- Big market opportunities. It’s good to be unique, but don’t pick a niche so specific that there’s little room for growth.
- A clear and developed business plan. No entrepreneur can map out their journey to the tee, but it’s always important to show the ability to plan for it.
- Innovative technology or intellectual property.
A good place to familiarize yourself with the landscape is AngelList. In addition, it’s fairly easy to find Angel groups in your local area. Do a bit of research and get ready to pitch!
- Venture Capitalists
Venture capitalists (VCs) are members of professionally managed funds who typically invest in early stage companies with massive growth potential. In addition to capital, venture capitalists provide their own expertise and mentorship for the businesses. Contrary to angel investors, a VC will invest a much larger sum of money. Additionally, they invest with the expectation to hopefully invest more in a later round of funding due to your success.
This funding option is most common for small businesses just beyond the start-up phase. If your business is scaling quickly and generating sustainable revenues, acquiring venture capital is typically a good option. Venture capitalists look for these sorts of opportunities where their money acts as “gasoline on the fire”.
However, there are a few downsides to venture capital. First off, the process of raising these funds is very long. It may take up to six months or even a year to obtain the funds, not to mention the process can be quite grueling. In addition, VCs typically like to gain a certain level of control. Generally, they’ll ask for board representation and a hefty amount of equity. If you’re not interested in that level of mentorship or parting ways with a large chunk of your business, this may not be the best option for you.
- Startup Incubators and Accelerators
Startup incubators and accelerators are both great financing options for young start-ups. First, it’s important to differentiate between the two.
Let’s start with an accelerator. Startup accelerators typically work with a startup for 3-4 months. In addition to offering guidance, office space, and a plethora of resources they’ll also provide you with capital usually in the $20,000-$40,000 range. So what’s the catch? An accelerator usually takes between 3%-8% ownership of the company. Their goal is to have your company VC ready by the time you’re done with the program. One of the most popular accelerators, Y-Combinator, has turned out some of the hottest companies like Airbnb and Dropbox. Take a look at their portfolio and vision to get an idea of how the accelerator ecosystem operates.
An incubator is a little less intensive and typically works with startups for one to two years. An incubator will typically take little to no equity of your business but generally don’t offer any capital investment either. Incubators are often funded by university grants or larger corporations so they can afford to house startups over longer periods of time.
These options are so highly sought after that it’s very difficult to get accepted to either program. Many of the top accelerators have lower acceptance rates than Harvard. Many companies apply every year to no avail. Additionally, incubators typically house companies they have connections to and are quite exclusive. If you choose to pursue this route, make sure you don’t spend too much time getting wound up in the application process. If you aren’t accepted it’s important that you get back on your feet and keep moving forward regardless.
- Peer to Peer Lending
Peer-to-peer (P2P) lending is a financing option where individuals and businesses can borrow money from one another without using a financial institution. These platforms are able to connect borrowers and investors and issue loans much quicker than any bank.
If you’re seeking a loan for your business, it’s probably best to go with a P2P lending platform over a traditional financial institution. There are tons of hurdles you’ll need to overcome before receiving a loan from a bank. These platforms can approve you for loans in as little as one week. Here are three of the most popular platforms that are definitely worth investigating:
- Lending Club: Lending club is the current leader in P2P loans with over $20B in loans issued. Lending club issues notes to the investors that are essentially a security. If you’re an individual you can receive loans ranging from $1,000 to $35,000 and if you’re a business $15,000 to $300,000.
- Prosper: Prosper provides 36 and 60 month loans ranging from $2,000 to $35,000. Prosper does not make SME loans and only offers unsecured consumer loans. Prosper grades the borrower based on basic criteria such as debt-to-income ratio as well as other soft checks typically conducted by credit bureaus.
- Funding Circle: Funding circle offers loans in the U.S. ranging from $25,000 to $500,000 with APRs ranging from 5.5% to 27.8% depending on the borrower’s grade.
By choosing a P2P lending option over institutional lenders you will save tons of time during the approval process. Not to mention you’ll likely get a better rate if you choose to go this route.
If you’re truly ready for the grind you can always fall back on the side-hustle. Every entrepreneur has multiple irons in the fire. Even companies with millions of dollars in funding have gone down in flames. That being said, it’s always good to have a side-gig to fall back on. In addition, side-hustling is a great way to self-finance your business.
You have to be very strategic when self-financing with a side-gig though. Since your ultimate goal is to scale your business, you don’t want to choose a gig that takes up too much of your time. Remember, your time is far and away your most valuable asset. Try to choose a gig where you can work from home so it’s not location dependent. Your ultimate goal is to have the flexibility where you can work your side-job anywhere and anytime.
A great place to look for find jobs are freelance platforms like Upwork and Fiverr. If you’re just starting out, it’ll be difficult to find projects since you have no reputation. Just stick with it and make sure you produce quality work and you’ll do just fine.
Nearly every business will need to obtain some form of capital while scaling. If you try and bootstrap or self-finance for too long, you may very well miss out on market opportunities. With so many funding options available, it’s your job as the entrepreneur to evaluate which option is best for your business and when. Use these eight options as a start and get ready for growth!