No matter how productive you are or how big your team is, you will eventually need funding to grow and pass the startup phase. It is challenging, in fact many entrepreneurs quit at this point. Luckily nowadays many platforms and technologies have increased funding accessibility to entrepreneurs that have a valuable product. Notice I used the word ‘valuable’ because no matter how well connected you are, a useless product or service won’t take you far and will always limit your chances of receiving significant funds from the right investors.
The first advice is to stay self funded for as long as you possible could. The last thing you want to happen is to sell your company short, owe a significant amount to banks or harm your reputation by disappointing family, friends and outside investors.
Here is how and when you should get funded.
LOCAL CHAMBER OF COMMERCE AND/OR SMALL BUSINESS DEVELOPMENT CENTERS
These two are one of the best funding options for entrepreneurs with just an idea. They organize contests such as Business Plan Competitions or Innovation Grants that give away sometimes even more than $10,000 to the winners. They usually don’t have major requirements for participation like proven track record or market acceptance. All you need is a well written business plan and a good pitch. This investment is coming from the government to boost small businesses so you won’t be giving away any equity or paying any interest. Use this funding option to build your Most Viable Product and acquire your early adopters before you can ask for a bigger amount.
While crowdfunding can be an extraordinary platform for innovative hardware prototypes or existing products to be sold directly to customers while raising money without giving up equity, it is not the smartest path to take for entrepreneurs with an intangible product such as Snapchat app. Imagine if Snapchat founders shared their idea on Kickstarter or Indiegogo when they first had it. Don’t you think someone else with resources could have built the app and outpaced the owners?
A successful crowdfunding campaign can also send a positive sign to future investors and banks about the demand for your product and may be a stepping stone to your next round of financing. Some established companies consider crowdfunding a better way to advertise and launch their new product. For instance, Eric Ries, writer of The Lean Startup, launched his new book, The Leader’s Guide, on Kickstarter even though he had the resources to promote it and sell it differently.
Lenders should never be the first option for a startup unless they need cash urgently to respond to high demand. Some of these lenders include OnDeck and Kabbage. They offer fast and easy loans that traditional banks can’t offer. While these institutions may even give you access to the requested money the same day, payback often begins the next business day and carry very high interest rates.
Only refer to these institutions if you are beyond the MVP phase and demand unexpectedly increased. In other words, don’t make the mistake of borrowing money to build a company.
Angels are typically wealthy individuals who invest in the early stages of startups. This doesn’t mean that they are always ready to spend their money on just an idea or a talented team, a proven product/market fit is in most of the cases necessary to attract their investment (please see Securing an Investment at An Early Stage).
Reach out to angle investors once you’ve launched your MVP and received promising feedback from customers. Show and prove that your company is growing at a high weekly and monthly rates then feel confident to ask for the necessary amount that will take you to the next level. Keep in mind that you must be careful in selecting angels because in addition to money, you will need guidance, contacts and exposure.
Venture Capitals (VC) provide much more than a larger pool of capital. They usually have industry experts, media exposure, connections and more. They will help you grow your company exponentially because their profitability comes from your company’s fast value increase. VCs also provide access to their talented team who could also help you improve your product faster and better.
VCs don’t usually invest early in the life of a startup. Angel investors typically get involved in the seed stage of a company while VCs come a little later. Don’t worry about receiving an investment from VCs when you first start especially if your company is not profitable yet or doesn’t have a massive user base.
Keep in mind that there are over a hundred decisions that could make or break your business every year. Take the necessary time to project the outcome of your financing decision and don’t hesitate to ask questions.
How else could entrepreneurs raise money?
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