Money Matters: 6 Ways to Find Funding for Your Business
So, you’ve got a great business idea and now…you need a great deal of money! Asking for financing can be nerve-racking, exhausting, and often the the biggest obstacle for entrepreneurs; but, the process can also be exciting, exhilarating, and most importantly, successful.
As someone who has sat on both sides of the table—with a checkbook and a hat in hand—I can help leverage the landscape to better your business. Whether you are launching or growing a company: money matters. Discover what works best for you with these 6 types of funding.
A starting point for many entrepreneurs, bootstrapping means financing your company without external help or capital. Using your own resources like savings accounts, credit cards or home loans can be one of the most efficient and effective ways to ensure positive cash flow.
But, if you run out of funds, don’t have a home to borrow against, or want to grow your business more quickly, it may be prudent to bring on outside financing.
Friends and Family
While it may be intimidating to hit up your loved ones for money, they are the people who know you best (and like you anyway!) and are most likely to be persuaded to invest.
When we began Videolicious, I turned to my former boss for funding, and my co-founder asked a friend and former colleague for an investment. These are people who believed in us—maybe even more so than our company—and made our first round of funding possible.
Still, few things complicate a familial or friendly relationship like money problems. So, if you do go this route, be sure to carefully go over your business plan and be clear about what you’re asking for. Whether it’s a loan, an investment, or a gift—lay out all terms so they know whether or not they should expect to get back any money they put into your business, and if so, how much.
These are affluent individuals—or a group of individuals—who pool their research and resources to provide modest amounts of capital, usually in exchange for equity ownership.
Many angel investors have found their own success and are looking to invest in new ventures within a specific industry. This can be advantageous, as not only do angels offer financing; but, they may be willing to provide guidance and mentorship based on their own experience. They can also leverage their existing contacts within an industry which is a huge added value.
So how do you find these angel investors? Here are some resources:
Online directories: AngelList and Gust are great resources to find independent angel investors and can be searched by geography or interest area. The Angel Capital Association has a convenient list of angel groups in their online directory. Some established angel groups include: Golden Seeds, Astia Angels, and 37 Angels. School alumni make up these angel groups: HBS Angels Alumni Association, MIT Angels. And you can also find city based angel groups like: New York Angels, Boston Harbor Angels
LinkedIn: This is a fantastic, and often overlooked resource. Just search for “angel investor.”
Network!: While this is the most labor intensive option, getting out there and meeting people at industry events, MeetUps, or conferences can be one of the best ways to find an angel.
Just like dating, this is a numbers game—the more angel investors and groups you meet, the better your chances of finding the right one or right ones for your business.
This type of funding is generally gift based, where fans or “backers” commit to buy early versions of the product, often months before it is released. Kickstarter and Indiegogo are examples of crowdfunding. It allows for a wide pool of small investors with fewer restrictions and can be ideal in the early stages of a business, especially if you don’t have friends and family to invest or aren’t ready for angels.
A great bonus of crowdfunding is that it can be used as a focus group or promotional marketing tool to sell your product. It’s a great way to validate demand in the marketplace.
The caveat to crowdfunding is that backers of these campaigns are usually less vested, and typically commit lower sums of money than other types of funding. They do not spend time doing diligence on your company or engaging your team.
In product crowdfunding sites you pre-sell a product for money, and in equity crowdfunding sites you actually sell a piece of your business for money. Equity crowdfunding sites allow you to connect with a large group of distributed angel and institutional investors, usually for a fee. Examples of equity platforms include SeedInvest and CircleUp.
If you’re looking for some serious funding (at least $1 million), you’ll need a venture capitalist (VC). While they are likely to request more information and will spend time on due diligence, VC firms can give you more money than any of the other types of funding.
While these firms have money to dole out, it comes with conditions—which is why some entrepreneurs avoid VCs altogether. VC firms generally invest in lots of companies, with the expectation that many of them will fail. They will spend a lot of time on diligence (investigating you and your company), and they may ask for some control, like board seats.
And beware, the bar for raising VC capital is very high. You can try browsing the National Venture Capital Association, although the best way to get a meeting is by leveraging your contacts. It’s always better to get a warm introduction to a VC since they get cold pitches all day long.
Whichever option or combination of options you choose—only you can determine what’s best for your business. Finding funding can be the hardest part of being an entrepreneur; but it’s also one of the most rewarding. The road to success is paved with allies—be it old friends or new angel investors—who can help make your business idea a reality.