One of the most frequent questions I get as a mentor to entrepreneurs is, “How do I find the money to start my business?” I always answer that there isn’t any magic and, contrary to the popular myth, nobody is waiting in the wings to throw money at you just because you have a new and exciting business idea.
On the other hand, there are many additional creative options available for starting a business that you might not find for buying a car, home or other major consumer item. If you have the urge to be an entrepreneur, I encourage you to think seriously about each of these before you zero-in on one or two.
Of course, every alternative has advantages and disadvantages, so any given one may not be available or attractive to you. For example, professional investors put great priority on your previous experience in building a business, and they expect to own a portion of the business equity and control of the funds they do provide. These are tough for a first-time entrepreneur.
Thus, it is always a question of what you qualify for and what you are willing to give up to turn your dream idea into a viable business. Here is my list of the ten most common sources of funding today, in reverse priority sequence, with some rules of thumb to channel your focus:
- Seek a bank loan or credit-card line-of-credit. In general, this won’t happen for a new startup unless you have a good credit history or existing assets that you are willing to put at-risk for collateral. In the US, you may find that the Small Business Administration (SBA) can get you infusions of cash without normal backup requirements.
- Trade equity or services for startup help.This is most often called bartering your skills or something you have for something you need. An example would be negotiating free office space by agreeing to support the computer systems for all the other office tenants. Another common example is exchanging equity for legal and accounting support.
- Negotiate an advance from a strategic partner or customer.Find a major customer or a complimentary business that sees such value in your idea that they are willing to give you an advance on royalty payments to complete your development. Variations on this theme include early licensing or white-labeling agreements.
- Join a startup incubator or accelerator.These organizations, like Y Combinator, are very popular these days and are often associated with major universities, community development organizations or even large companies. Most provide free resources to startups, including office facilities and consulting, and many provide seed funding as well.
- Solicit venture capital investors.These are professional investors, like Accel Partners, who invest institutional money in qualified startups, usually with a proven business model, ready to scale. They typically look for big opportunities with a proven team in need of a couple of million dollars or more. Look for a warm introduction to make this work.
- Apply to local Angel investor groups.Most metropolitan areas have groups of local high-net-worth individuals interested in supporting startups and willing to syndicate amounts up to a million dollars for qualified startups. Use online platforms like Gust to find them in general and local networking to find ones specific to your industry and passion.
- Start a crowdfunding campaign online.This newest source of funding per the JOBS Act in the US, in which anyone can participate, is exemplified by online sites like Kickstarter. Here people make online pledges to your startup campaign to pre-buy the product for later delivery, give donations or qualify for a reward, such as a tee-shirt.
- Request a small business grant.These are government funds allocated to support new technologies and important causes, like education, medicine and social needs. A good place to start looking is Grants.gov, which is a searchable directory of more than 1,000 Federal grant programs. The process is long, but it doesn’t cost you any equity.
- Pitch your needs to friends and family.As a general rule, professional investors will expect that you have already have commitments from this source to show your credibility. If your friends and family don’t believe in you, don’t expect outsiders to jump in. This is the primary source of non-personal funds for very early-stage startups.
- Fund your startup yourself.These days, the costs to start a business are at an all-time low, and over 90% of startups are self-funded (this is also called bootstrapping). It may take a bit longer to save some money before you start and grow organically, but the advantage is that you don’t have to give up any equity or control. Your business is yours alone.
You can see that all of these options require work and commitment on your part, so there is no magic or free money. Every funding decision is a complex tradeoff between near-term and longer-term costs and paybacks as well as overall ownership and control. Yet with the many options available, there is no excuse to stop dreaming about living and actually start living your dream.
Image credit: CC by Howard Lake