Entrepreneurs are often in such a rush to find startup funding that they often fail to carefully consider all of their potential financing sources. Contrary to popular belief, you can afford to slow down. Yes, your business needs money, but it is in the best interest of your new venture to pause and make sure your startup capital is coming from the best source possible.
Below, are the most common sources for new business capital and the advantages and disadvantages of each one.
Make sure you are considering all of your options when searching for startup funding.
Friends and Family
If this is a new business or a novel product; or if the management is inexperienced, consider family and friends as potential investors. These are people that love you and want to support you, and may therefore fund ventures that are little more than ideas.
Investments from family and friends are especially valuable because they often come at an incredibly early stage, when obtaining funding form management firms would be unlikely. Investments from family or friends typically range from $1,000 to $25,000.
Angels are wealthy and/or successful individuals – often entrepreneurs, themselves – who are looking to invest in early-stage companies in order to earn an acceptable rate of return. They may operate as individuals or in tandem with others.
They may also look to get involved personally by mentoring the other owners of the operations they fund. This can be a fantastic opportunity to both learn from already successful entrepreneurs and fund your startup simultaneously. Angels will typically invest $25,000 up to $250,000.
Crowdfunding is a relatively new form of capital generation brought about by the advent of the Internet. Simply put, crowdfunding pools very small amounts of money from a very large group of people.
When done successfully, the result is one large lump sum of money that can be used towards funding a single project. In the digital age, crowdfunding is most frequently done online, but can still be done in off-line, “analog” networks as well. There are four principal forms of crowdfunding:
- Donation-based: funders are donors rather than investors, and therefore they receive no equity in return for their funds.
- Equity-based: funders receive an ownership stake commensurate with their investment.
- Revenue-sharing: profits are shared with investors.
- Peer-to-peer: personal loans are made, and interest is earned by investors.
Venture capital is money exchanged for an equity stake in a company. These are often early-stage investments and are enacted by very experienced investors. Growth is typically the motivating facor for obtaining venture capital, but these individuals may also bring managerial, operational, and technical experience and mentorship to the table.
In return for their typically large investment, venture capitalists commonly demand large portions of equity in the businesses they invest in. Investments from venture capitalists usually range from $250,000 on up to millions of dollars.
To reiterate: don’t be afraid to slow down when raising startup capital. Be sure you are considering the full scope of investors for your business and making an informed decision.