On the quest for startup capital, make sure you consider all your options.
Show me the money! That’s what every entrepreneur wants to say once their business plan is in place. But over the years, I’ve seen many people make mistakes as a result of rushing to find seed money without considering all the potential financing sources.
Slow down! Yes, your business needs money, it’s the lifeblood of all corporations, but make sure your seed money comes from the best source possible. Below I outline the most common sources for capitalizing your business and I layout the ins and outs of each.
Friends and family
If this is a new business, or a novel product, or if the management team is inexperienced, consider the people closest to you as potential investors. These people will often fund ventures that are little more than ideas. Obtaining money from management firms would be exceedingly difficult under these circumstances. Investments from family or friends typically ranges from $1,000 to $25,000 and can be structured as a debt/loan or in exchange for an ownership stake.
Angels are people with wealth and/or successful entrepreneurs who need to park their free cash somewhere in order to earn an acceptable rate of return. These people operate as individuals or in tandem with others. Sometimes several angels join together and form clubs as well. Angels will typically invest $25,000 up to $250,000 and aren’t usually afraid of startups and early-stage companies. Angels will often look to assist in mentoring the other owners of the operations they fund. This can be a great opportunity to learn from highly successful business people and fund your startup at the same time.
Crowdfunding is when a large number of people pool small amounts of money to form a bigger chunk of money to invest in one project. This is often done online but can be done in off-line networks as well. There are many popular forms of crowdfunding.
- Donation-based: The funders are donors rather than investors and no equity is exchanged for the funds.
- Equity-based: Funders receive an ownership stake commensurate with their investment.
- Revenue-sharing: Profits are shared with Investors.
- Peer-to-peer lending: Loans are made and interest is earned by investors.
Venture capital is money exchanged for an equity stake in a company. These transactions are often early stage investments and are enacted by extremely high-aptitude investors. Obtaining funds for growth is typically the primary purpose for obtaining venture capital, but many of these individuals can also bring managerial, operational, and technical proficiencies to the table. Venture capitalists commonly demand large portions of equity and/or a controlling interest in the businesses they invest in. Capital outlays from these investors usually range from $250,000 up to millions of dollars or more.
Don’t be in too big of a hurry to obtain your startup capital. Consider all the different types of investors for your business and make an informed decision. You’ll be glad you did.