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It takes money to turn a great idea into a great product, but “money doesn’t grow on trees” and you may not have thousands of dollars just waiting to be spent. So how do you turn your dream into a reality? Here are some of the best options.
Self-Funding / Bootstrapping
Many entrepreneurs start with some level of self-funding (also known as bootstrapping) and, in fact, future investors likely will want to see that you have some “skin in the game”. Even if you can only put in a little money, it is worth considering the benefits. For example, you don’t have to worry about keeping investors happy. You also can keep more profits to yourself. Many founders also hold off on taking a salary, consider tapping into the 401(k) retirement account, and/or have a side job to help make ends meet while they get their business up and running.
You also can use your initial profits to bootstrap future growth instead of relying on future funding rounds.
Friends and Family Investors
First, make sure you read our guide on raising money from friends and family investors and the dangers that your startup faces. Your friends and family may be willing to help you grow, and they probably wouldn’t make you jump through the many hoops. These investments generally are some type of loans or stock purchases and are something later investors will likely find to be a positive (i.e., if your family and friends don’t believe in you, why should the investor).
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However, to protect yourself and your relationships, make sure you have a clear written agreement that outlines how the money will be repaid. Also, remember that even if the arrangement is informal, you should confirm if any securities restrictions apply to the arrangement.
Crowdfunding is quickly becoming a popular way to help fund a startup.
However, before seeking crowdfunding, make sure you look at our guide on the various crowdfunding legal issues and tips on how to avoid legal mistakes.
In the traditional approach to crowdfunding, you offer a first-run product or some other incentive in exchange for a monetary contribution. Contributors receive no equity and are not entitled to be repaid.
In many cases, the process is essentially a pre-sale of your product and not an investment — and not regulated by the federal Securities and Exchange Commission.
Equity crowdfunding is a newer option made possible under the Jumpstart Our Business Startups (JOBS) Act — which allows you to seek small investments from a large number of investors. You use a crowdfunding platform to post a listing similar to a traditional crowdfunding campaign, but your investors become shareholders. This includes voting and dividend rights as outlined in the shareholder agreement.
If you’re interested in equity crowdfunding, carefully review the requirements of the Jumpstart Our Business Startups Act because it is a regulated securities offering.
Incubators / Accelerators
Incubators and accelerators generally provide groups of startups with workspace, business advice and training, and potential funding. They are often sponsored by universities, industry organizations, or individual companies. You can learn more about what you should do to legally prepare for the accelerator program beforehand in our guide here.
Each startup gets support from the sponsor plus networking opportunities with the other startups. In exchange, the incubator or accelerator may take an equity stake especially if they provide funding.
You can find incubators and accelerators geared towards local businesses in most cities. Accelerators and Incubators with national recognition include the following:
- Y Combinator
- 500 Startups
- Amplify LA
- Chicago New Venture Challenge
- DreamIt Ventures
- Capital Factory
- Launchpad LA
Marcus Lemonis from the TV show “The Profit.”
Before seeking out angel investors, it is highly recommended to make sure that you read the guide on angel investors and the things startups must know and prepare for beforehand.
The upside is often a closer personal relationship that includes heavy mentoring. The downside is that an angel investor will often ask for a large equity stake and possibly even a controlling interest.
Typical investments frequently range from $25,000 to $250,000. Because angel investors operate with a smaller, less formal structure, they can have widely differing expectations of the terms of an investment. While getting a large investment offe