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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).
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 offer is exciting, you need to make sure it’s best for you.
Venture capitalists are professional investors who invest in startups and growing companies. This makes them a receptive audience when you’re looking for investors to pitch. However, you’ll generally need to be past the earliest stages because the typical venture capital investment is $1 million or more. It may also take many months to close the deal.
It is highly recommended to read this guide on how to get venture capital and the most important things startups must do beforehand.
Make sure that your interests are aligned with a prospective venture capitalist. These firms often seek fast returns and push for rapid growth. This may go against your desire to build slowly and steadily.
Venture capitalists also seek, and regularly exercise, substantial control over a company. If you want to follow your own vision, venture capitalists may not be right for you.
It is further important to note that venture capitalists typically want to use their own investor agreement. As with any important contract, you should carefully review it to ensure it promotes your own interests and goals. Don’t be afraid to negotiate changes or walk away if it doesn’t.
Loans / Credit Cards / Debt
New businesses can find it challenging to get a traditional loan from a bank unless they have business assets for collateral and/or are willing to personally guarantee the loan (e.g., by putting up the equity in their house). However, the federal Small Business Administration (“SBA”) offers several small business loan programs that can help you get approved. Some entrepreneurs also may utilize credit cards, microloans or venture debt to finance their companies.
Once you have steady sales, you may be able to open a credit line against your accounts receivables (what customers owe you) (also referred to as “factoring”) or use your business equipment as collateral for a loan (also known as an asset loan).
Small Business Grants
Grants provided by the government or private organizations can provide free funding. To receive a grant, your company may need to be engaged in some sort of societal good or specialized areas, such as education, medicine, or alternative energy.
If you do receive a grant, there may be limitations on how you can use the money, and this could create an additional accounting burden for you.
Many businesses understandably prefer to be paid in cash, but there is still room for trade in the modern economy. Look for small businesses that can fulfill one of your needs and have a problem that you can solve. You may be able to trade your services in exchange for something you need (e.g., agreeing to do IT for a company in exchange for using their office).
Even if you don’t directly receive cash, the savings will allow you to further stretch your resources.
Partnership / Licensing
Sometimes, growing on your own isn’t the answer. Instead, you may want to create a partnership or licensing deal with an established company that can benefit from your product.
For example, if you invented a cell phone battery that lasted twice as long as existing batteries, you could: (i) go through the expensive and risky process of trying to market your battery independently to consumers, or (ii) strike a licensing deal with an established manufacturer who would love to put your battery in their next model.
In a partnership or licensing arrangement, funding might be limited to an advance on a first order to help you scale up your manufacturing. However, the bigger win is that by reducing the costs of setting up your own supply chain and marketing strategy, you won’t need as much funding.
Commitment to A Major Customer
If you can lock in a major customer, they may be willing to fund your development. In exchange, they may want to adapt your production process to their exact specs, receive exclusive distribution rights, or get dedicated support. This commitment may be tied into an early licensing deal or white-label agreement.
You’ll also gain the advantage of reducing the risk of your investment by locking in a guaranteed minimum return.