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Money, Money, Money: Top 10 Ways to Finance Your Startup

July 23, 2012



Thanks to Tax Credits on flickr

Startups who need capital have often walked a well-worn path. First you use personal savings to get off the ground, move on to asking your friends and family for money, grow to the point where you can attract the attention and checks of private investors or banks and then plan on a glorious initial public offering.

Well, times have changed. While many of the traditional financing strategies are still very useful, a startup has many more avenues to sustainability that ever before.

1) Sweat Equity – High-value skills and a clear vision can create the framework for a successful enterprise with very little cash. In today’s world pushing a minimum viable product to market as quickly as possible can get your venture noticed quickly. Even a lightweight operation has access to world-class collaboration tools such as Asana, Creately and Vyew; often for free.

2) Self-Funding – Are you willing to be your own angel investor? Having a little savings to draw from can make your initial development work go faster and be significantly less stressful. If you don’t have the pockets to dive into your venture full-time, think about splitting your efforts between your startup project and consulting. If you have a team, each team member can rotate between developing the startup with sweat equity work and funding the startup from consulting gigs. Envy Labs used this strategy to get Code School off the ground.

3) Friends and Family – If your startup can get anyone’s attention, it should be that of your friends and family. Combine a great idea with promising early results and you can pitch a ground-floor opportunity to those you know and/or love. A major advantage of friends and family financing is that the potential investors are easy to find and contact. You also, by definition, know one another. This type of funding has a serious downside as well. Those close to you may not be sophisticated investors and may not really appreciate the downside risks of a startup. Mixing business and your personal life can lead to uncomfortable holiday dinners or worse if things fall apart. Unaccredited investors may complicate later funding rounds as well. AngelBlog has a good article on avoiding common problems with friends and family financing.

4) Reward-Based Crowd Sourcing – Reward, or perk, crowdfunding is the most popular form of crowdfunding today. Driven by some huge successes like DoubleFine’s 3.3 million dollar project funded through Kickstarter has brought a new way to raise large sums without equity dilution. Kickstarter has a heavy focus on tangible products, game development and art projects.IndieGoGo is another source of crowdfunding and also raises money for health treatment and personal use. You can find a video explaining crowdsourcing and crowdfunding at Crowdsourcing.org

5) Angel Investors – Oh, to have an angel on your side. Angel investors are high-net worth individuals who have the resources to invest in early-stage companies. Brad Feld, a highly-regarded angel investor provides a definition here.Experienced angel investors can also often provide valuable business guidance and access to other interested investors. A good angel can also be an invaluable mentor. You can find a guide to locating angel investors in this article at Inc.

6) Join an Accelerator – Want to go faster? Have an idea with a great pitch right now? Have 12 weeks or more where your team can pick up stakes and focus exclusively on developing your product? Willing to trade equity for a little money and a lot of advise? An accelerator might be just the thing for you. Dominated by accelerator veterans Y Combinator and TechStars, the field now has many new entrants. Many more startups, such as those listed in the Semi-Complete List of Startup Accelerator Programs have a regional or university affiliation.

7) Alternative Lending – It is no secret that bank lending is tight. You still have options if the bank will not lend to you. Private small business lenders such as OnDeck Captial and Prosper.com connect private lenders and borrowers. Be sure you understand the terms and what you have at stake if your loan becomes delinquent. Check out this article for more information on non-bank loans.

8) Equity Croudsourcing – Now that the Jumpstart Our Business Startups Act, or JOBS Act, became law in April, small businesses have an easier time raising equity funding from small investors. Equity crowdfunding is likely to take off as Candice Klein of SoMoLend explains.

9) Venture Capital – Venture Capital firms, such as those in Silicon Valley, can bring millions of dollars to startups who demonstrate strong upside potential. Practically every new technology company now trading publicly, including Google, Facebook, Zynga and many others, received significant venture capital funding.

10) Merger or Acquisition – If your product of service fits nicely within the product strategy of a larger company, you may get a nice payday through a merger or acquisition. The financial rewards could be even grater than with an IPO. From YouTube’s purchase by Google, to Radian6 joining Yahoo to Instagram’s spectacular nearly billion dollar sales price to Facebook, mergers and acquisitions can provide a tremendous payday to shareholders.

Whatever funding route you pursue, be sure to understand the details of the deal and watch your burn rate. Here’s to your success!

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