Raising capital might be the hardest challenge a young entrepreneur will face. Convincing someone else to believe in your dream takes resilience, planning, and a strong presentation.
You might be turned away 50 times before you persuade one investor.
Bootstrapping should always be your first option. Unfortunately, most young entrepreneurs don’t have much in assets or money, and if your idea is complex enough, you'll need to bring in outside sources of capital.
To start, there are some questions to ask yourself. Are your goals defined? Does your idea have a definite future? Will it make money?
If you can answer yes to each of these questions, you might be ready to build your future business. But startup funding can range from a few hundred to several million dollars, and each option has its pros and cons. What are they, and how can they work for you?
How to Raise Capital: 8 Ways to Help Get Startup Business Funding
Looking for startup business funding? Here are eight ways to help raise capital for your startup.
1. Bootstrapping
Bootstrapping is the self-funding of your company through stretching resources and finances. In short, you're starting your company with just the money and assets you currently have. This is often the ideal choice as it gives you full control of your business, forces you to produce efficiently, and carries no debt or obligation to a third party.
Bootstrapping should always be your first option. Unfortunately, most young entrepreneurs don’t have much in assets or money, and if your idea is complex enough, you'll need to bring in outside sources of capital.
2. Friends and Family Donations
Family donations come from just that, your friends and family. Because of this, they don’t have the paperwork requirements of the other debt-funding outlets, and they are usually your first option outside of yourself. Crowdfunding your inner circle for capital in the form of debt can be a great way to raise funds without giving up equity or control in your company.
3. Government Grants
Grants awarded by the U.S. government typically involve strict criteria, but do not have to be paid back or require a loss of controlling stake. They can be, however, difficult to receive and can require an extensive application process. Grants can be few and far between and often industry-specific – think clean energy, sustainability, biomedical research, and nonprofit.
4. Business Loans
Business loans are a more traditional debt-based funding route. Venture capital firms and investors take losses, but banks do not. Government-backed loans come with low interest rates, but have strict requirements. Personal loans require good credit and higher interest rates and can be difficult for startups with no track record to qualify. If you go this route, shop around and compare prices thoroughly.
5. Crowdfunding
Crowdfunding is the pooling of money from many individuals through either an organization or website. This can help support the startup cost of a specific project or company. Contributions may take on the form of donations as well as trading equity or tangible rewards like merchandise, exclusives, and memorabilia in exchange for capital. If you go the rewards-based route, you also retain much more control of your business. Kickstarter, Crunchbase, and AngelList Venture are just a few examples.
6. Angel Investors
Angel investors are high-wealth individuals who provide startup capital to entrepreneurs in exchange for a percentage of equity in the company. This “seed” money is almost always out of pocket and ranges from a few thousand to a couple hundred thousand or more. Angels typically take on a mentor or advisor roles in the company as well, so it's important that they're knowledgeable about your industry. Angel groups consist of multiple angel investors pooling their money together to invest a significantly larger amount in multiple startups. You can research accredited investors at the Angel Capital Association, and look for ones in your own region and industry.
7. Venture Capitalists
Venture capitalists, like angel investors, exchange startup capital for equity. VCs focus on later-stage funding, usually exceeding an amount of $2 million in capital. Venture capitalists do not pay out of pocket but rather invest other people’s money in the form of private equity, or pensions, for example. Because of this, they generally take on high-risk, high-reward companies, like young technology startups, in hopes of them being sold or reaching an IPO. They also take on much more equity in the company and can influence important business decisions.
8. Use a Credit Card
You might consider funding part of your startup costs with a business credit card. Many business owners go this route to kick off their business. Pay close attention to the terms and conditions and find one that offers an interest rate you’re happy with. Make sure you’ll be able to pay the balance off each month.
The Takeaway
There are multiple ways to consider funding your startup. Do your research, consider what will work best for your situation, and don't forget to ask questions.
A version of this article was originally published on December 13, 2013.
Photo: Getty Images
