An Entrepreneur's Guide to Navigating Various Funding Options
Ideas are wonderful. In fact, ideas are what make the world such an interesting place. Unlike other species, humans have the ability to creatively and artistically brainstorm new ideas that did not previously exist. Unfortunately, ideas are not always enough.
In the business world, you need more than an idea to launch a business, satisfy a paint point, and become wealthy. In the business world, you must be able to turn this idea into a feasible product or service that can be monetized. And unless you have an unlimited supply of resources in your back pocket, you aren’t going to get very far without funding.
Why entrepreneurs fail to secure funding.
New venture funding is obviously very important, yet few understand how to successfully finance their ideas in order to move from concept to product. In most cases, this is a result of one of the following:
- Poor idea or concept. Sometimes entrepreneurs don’t get funding because their idea or concept is poor to begin with. If you don’t have a good idea, it doesn’t matter how much you know about funding – you won’t get any support.
- No strategy or plan. Other times, entrepreneurs have a good idea, but they’ve done very little research or planning to show potential funding partners why the idea is worthy of support. If you don’t have a well-researched and documented business plan, you won’t make it anywhere.
- Lack of knowledge. Finally, some entrepreneurs have a good idea and comprehensive strategy for bringing their product to market, but they don’t have any understanding of how funding works. In other words, they don’t know who to ask or where to go.
Do any of these three issues sound familiar? If you’re like a lot of entrepreneurs, the last one is particularly troubling. That’s why we’re going to investigate this topic in detail.
Six different funding options.
After reading this article, you should have no excuse for a lack of knowledge in regards to the various funding options out there. While this is by no means a comprehensive list, it does outline the major funding options that are likely available to you.
1. Venture capitalists -- Let’s start with venture capitalists, since this is one of the best options (and most commonly misunderstood). By definition, a traditional venture capitalist is a private investor who provides a company with capital in return for an equity stake in the business.
Generally speaking, venture capitalists want to see a specific rate of return on their money within the first few years and frequently demand large percentages of the company in order to exercise control and guide the direction of the company; though this isn’t always the case. The ideal objective for a venture capitalist is to bring the business to its initial public offering (IPO) stage so that they can sell their shares for a major profit.
You can easily find information on reputable venture capitalists, but be forewarned that most have strict requirements and often prefer established startups that have already shown a proof of concept.
2. Angel investors -- Angel investors are similar in nature to venture capitalists, except they often work with smaller operations and provide a lot of hands-on-help and coaching. If you’re serious about raising money – and willing to give up a sizeable percentage of equity to learn from an experienced entrepreneur – then angel investing may be the route for you.
You can find out about angels in your area by contacting the SBA, local entrepreneurship and investing groups, or running some targeted online searches. However, prior to reaching out to these investors, you need to know what you’re getting into. There are both pros and cons to working with angels, so figure these out before proceeding.
3. Bank loans -- Small business loans from local banks are still very popular among entrepreneurs; however, it should be noted that lending is much stricter now than it was 10 or 15 years ago. With that being said, this should be one of the first places you look. If they say no, then you can move onto one of the other options discussed in this article.
The biggest disadvantage of using a bank loan is that these lenders will often ask you to use your private assets as collateral. “Banks are cautious in light of the credit crisis that is still fresh in lenders’ minds,” says Adam Spettner of Reliant Funding. “It’s likely that the bank will require you to personally guarantee the loan. If your company defaults, you may lose your home, your car, investment portfolio or other valuables.” This is something you must be prepared to do when interacting with banks.
4. Private funding -- Private funding is always an option. In fact, it may be the best option if you’re particularly green. Whereas venture capitalists, angel investors, and banks may laugh in your face, friends and family members may be more willing to help.
According to Fundable, friends and family are actually the biggest funding source for entrepreneurs. They invested more than $60 billion in new ventures in 2014 – which was almost triple the amount from other sources. It should be noted, however, that the average amount per startup was only $23,000.
As a word of caution, if you’re going to pursue private funding, be very careful about who you ask. You should never borrow from someone who’s so dear to you that you would be devastated if your relationship ended. Secondly, you shouldn’t ask for money from anyone who can’t afford to lose the amount they give you. Assume your startup fails and think about what the relational and financial consequences would be.
5. Self-funding -- Self-funding may be an option, though it doesn’t always look like raiding your checking account. Self-funding options include selling your home and using the money, taking out a home equity line of credit, using credit cards, and more. These are generally considered very risky options, but it’s important to know they exist. Be very careful when going down these roads. One misstep could not only end your startup, but could also damage your personal finances for years to come.
6. Crowdfunding -- Finally, there’s crowdfunding. This is a relatively new funding option, but is becoming increasingly popular. The most popular crowdfunding platforms include Kickstarter and Indiegogo. You can use these websites to raise money from average people in return for giving out incentives. The great thing about crowdfunding is that you don’t have to give away any equity.
Do your research.
You can’t expect funding to naturally follow your idea. No matter how incredible your idea is, you’re going to find it difficult to attract funding if you aren’t aware of which options exist. Do your research on each of these options and find out which ones are best suited for your idea or venture. The more choices you have, the more likely you are to secure funding.