Securing funding is a milestone that nearly every founder strives for. But raising money isn’t as simple as it might seem, as the company’s stage must be taken into consideration when determining who much, or if, money should be raised.
Luckily, if you’re a founder that’s looking to securing funding for your startup but aren’t sure what your options are, we’ve written post that outlines the various sources of capital to consider, according to advice from David S. Rose, the founder and CEO of Gust, as well as a Mentor for the New York Founder Institute.
Friends, Family, and Fools
At this stage, you’re probably just starting out, armed with little more than your laptop and a good idea (or at least what YOU think is a good idea). Once you’ve put some of your own money into your startup, it’s time to start raising money from outside sources. And by “outside sources”, what David really means is friends, family, and fools.
Remember, your loved ones, colleagues, and random people you encounter aren’t giving you their money because they believe in your idea or because they think they’ll get that money back with interest, they’re doing it because they care about and want to support you.
Keep in mind that raising money at this early stage isn’t required to secure funding from more “professional” sources later on, but it can help establish your credibility by proving that people who’ve known you for a long time actually trust you with their cash.
Nowadays, angel investors are looking for companies that have already made considerable progress. The average angel investor looks at around 40 different companies before making an investment, if you are at this stage, don’t expect an immediate “yes” from the angels you meet.
It’s much more difficult now than it was years ago to convince an angel to invest in your company if you only have an idea, business plan, or team. And keep in mind that angels aren’t investing in you because they believe in you, like your friends and family do, but are investing in you because they’re convinced that your idea will work and that it will make them money later.
Believe it or not, securing grant funding is one of the only ways to get free, large amounts of money for your startup, and have numerous benefits for your startup beside the monetary. Grants aren’t loans, in which someone gives you money and expects it back, and they’re not investments, in which someone gives you money in exchange for a piece of your company. Also, your chances of receiving grant money are considerably higher than other means of funding; about 1 in 4 small businesses that apply for grants actually receive them.
Many federal organizations are required to give a small portion of their budget to helping small businesses that are building innovative products or services in numerous industries, from robotics to IoT to agriculture and more.
However, one of the biggest downsides of grants is their complexity; they typically take around 3 to 6 months to secure, require copious paperwork, and your startup must be presented to a review panel.
Angel groups are organizations that consist of individual angel investors. Whereas angels invest in the tens of thousands by themselves, angel groups usually invest in the hundreds of thousands. There are several platforms founders can use to find angel groups, including Gust (of which David S. Rose is the founder and CEO), and they are usually organized by sector or industry.
Strategic investors work for larger companies that invest in smaller companies not just for financial reasons, but because they think that your company can offer them something outside of profits. For example, a strategic investor may be interested in your startup because it offers a solution their company doesn’t, or they may want to tap into your customer base, or because your company is developing a technology that may make it eligible for acquisition.
Since a strategic investor would only be interested in your company because you offer something they really need, they may give you an offer that’s better for your company financially than that of other investors, but keep in mind that that company’s values may not be aligned with yours.
The primary difference between venture capitalists and angel investors is that venture capitalists are basically professional money managers, managing other people’s money, whereas angel investors invest their own money. In addition, VCs make investments in the million dollar range, while angels usually stay in the thousands.
Because VCs make such large investments, they only invest in companies that are more advanced and have considerable traction. And since they only invest in more “mature” startups, the average startup only has a 1 in 400 chance of receiving VC funding.
Banks is another potentially effective, if overlooked, source of startup funding. However, because banks are low-risk, keep in mind that banks only lend money if a company is profitable and can confirm where their profits are coming from. Since banks don’t like to take risks, they are only in the business of “renting” money, so if you go with this option, remember that you’ll have to give that money back with interest.
Initial Public Offering
A company should only go public if it has a high valuation and is highly profitable, which means that only a small number of companies actually go public each year. If a founder were to take his or her company public if they are still at an early stage, the company will fail because no one will buy stock in a company that’s not established.