At some point you will need to raise cash for your startup.
The timing and source of the money will depend upon where you are in the development stage of your business. For instance, if you are just starting out and haven’t even developed a prototype of your product or service, then any funds that you will need are more than likely going to come out of your bank account or from a credit card.
Once you have taken your idea and put some structure around it with some collateral and hopefully a prototype, then you can start thinking about the following sources to secure additional funding for your startup.
Crowdfunding offers you the ability to solicit cash from an online crowd of individuals that like your idea so much they are willing to invest in advance of the product being developed. In return, you would typically promise to give them one of the first units for free or some other form of reward.
If you decide to go this route to raise money for your idea, then you will select one of the popular crowdfunding platforms like Kickstarter, Indiegogo, Bolstr, Fundable, or AppsFunder. You will need to do some research to pick the right platform for your project as they all have different qualifications, audiences and features.
Once you have selected your platform and completed the necessary requirements to showcase your flash of cash, then you will need to contact all of your family, friends and other people in your social networks to let them know about your project and ask them to consider a donation. Hopefully this will trigger enough momentum that others outside of your personal networks will also decide to invest.
It’s no secret that raising money outside of your own pockets for a startup can be difficult. Most people don’t like to part with their hard earned money for an idea that is more than likely to fail. However if you can locate someone that believes in your idea and abilities, then consider asking them to be a partner in your new venture.
Partners can not only provide you with valuable resources, but also act as a sounding board as you develop your product or service. Some partners will only be interested in making an investment in your company in exchange for an equity stake. Think SharkTank. Others will want to be much more hands on in the day to day activities of the business. You will need to decide what is right for you to achieve your goals.
Before you settle on any type of partnership, make sure you have a discussion with your attorney to draw up the paperwork that fully describes how your agreement will work. Partnerships can be very beneficial to both parties, but can also wind up badly when someone doesn’t want to be a partner anymore.
3. Angel Investors and Venture Capitalists
While both Angel Investors and Venture Capitalists invest in startups, there are some key differences between the two. Angel Investors invest their own money and are more willing to work with early stage companies. Venture Capitalists on the other hand invest other people’s money and are much less likely to invest in businesses that are just starting out.
In either case, both Angels and VCs understand that investing in startups is risky business and anticipate that most of them will fail. However, they expect to cover their losses by investing in a couple of businesses that will become wildly successful — they are looking for the next Apple, Facebook or Twitter.
If you are lucky enough to attract the attention of either Angels or VCs, then they offer the added benefit of having the experience and business contacts to help you succeed. In exchange for their knowledge and investment you can expect to give up equity in your business and will have someone constantly looking over your shoulder.
You can always try to get a loan from family, friends or a bank. The difference between a bank and a venture capital firm is that the former expects to get all their money back plus interest, while the later expects only the possibility that they will get their money back.
Banks don’t like to take big risks and want assurances that they are going to get their money back. They will want to know exactly what you are planning to use the loan for. It will be much easier to get a loan from a bank if you going to buy inventory or some other tangible asset that would have value even if your business fails. Usually the only way to get a bank loan for a small business is to get a guarantee from the Small Business Administration (SBA).