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Which type of startup funding is best for your startup?
In the post-Shark Tank world we live in, it’s important to understand that as a startup founder your hopes and dreams for securing funding are not limited to a one-shot presentation in front of a panel of investors. In fact, if you’re at the stage where you’re looking for serious VC money, chances are good you’ve already secured enough funding to create your minimum viable product and can count on a relatively steady revenue stream.
Big investment firms and angels see too many startups throw big seed money at your company when it ’s just in the idea phase. That model used to work, but the ease of starting a business in the digital age has forced businesses to prove themselves first. The good news is, there are more ways than ever to fund your startup, no matter what stage of development it’s in.
You might find that this is your only option at the very beginning. Putting up your own money to fund early prototypes and DIY marketing ideas can be a slow go, but at least you’ll be 100 percent in control of your idea. Plus, it looks really attractive to investors later on to see how much of your own sweat went into getting your business off the ground.
Of course, you can pretty quickly run out of money this way if you’re not careful. Pure bootstrapping efforts are usually made by founders who still work a day job for precisely this reason. Knowing which aspects of your business to invest more heavily in is crucial as well.
The Three F’s
There are three F’s that can help initial fundraising efforts: Family, Friends and Financiers. Financially backing your new venture can be a great way for your family and friends to support you. It also allows them to feel a sense a pride to see you thrive, and they want to see you successful.
Additionally, there are groups that are financiers. These tend to be wealthy individuals who are searching for ways to give away their money. It might be a rare find, but they can be a lucky find.
Kickstarter and Indiegogo campaigns are a dime a dozen, so running a successful crowdfunding campaign is actually a great testing ground for your business idea as a whole. Sure, it can be easy enough to get your relatives to throw some cash your way, but does your idea have a compelling enough story to get strangers to not only care, but to pass the word to their friends and family?
The biggest benefit to crowdfunding is that you can raise a large chunk of cash quickly with no loss of equity. You can also see, in real time, the “virality” of your idea, and depending on how quickly you deliver your promises to your backers, you’ll create a loyal fan base that can help you during future testing and launch phases of your business. One potential area of concern with funding this way is making sure you have the resources to deliver your stated promises. A sudden feeding frenzy of backers can be a blessing and a curse.
If you want to raise more money in one place without giving up any company control, the bank is a great place to go. You’ll still have to pitch your idea like you would to an individual investor, but the talking points are slightly different. Lead with your business plan and always be sure to emphasize where you see your revenue streams coming from and exactly what costs you will be using the loan to cover. A bank is unlikely to be wowed by the promise of an innovative idea if you can’t show a three-year forecast. Banks are anything but a sure thing when it comes to funding, so help yourself out by determining which personal assets you’d be willing to put down as collateral. The closer you get to 100 percent matching the loan amount, the more likely you’ll be to secure it. Of course, if your business fails, you could lose more than just your company.
Your local community and programs
Communities take care of their own. No one wants to see a great idea leave its home city or state. That’s why organizations exist that connect potential investors with startup founders in their backyard. In Arizona, Invest Southwest provides resources and education for both sides, as well as sponsors the Venture Madness competition that helps fund the most worthy local startups.
The best time to approach a firm or individual investor is before you actually pitch them. With so many startups crossing their desks on a daily basis, it can actually be to your advantage to call on VCs for advice, share your struggles and show how you can overcome them, then demonstrate some initial traction before formally pitching. If you’re raising $10,000 in revenue a month per each of your founders, you’ll pique the interest of investment firms.
The more specific you are in describing where the money will go, the more impressive you’ll be in a meeting with VCs. Hone your story so that, in the minds of the investor, their cash influx is the last piece of the puzzle needed for success. Still, understand going in that the odds aren’t in your favor simply based on the saturation of ideas. While these aren’t the only ways to fund your startup, they all share one thing in common: they require an incredible amount of time and effort on your part to come to fruition. In each case, you risk missing your golden opportunity if you’re underprepared or haven’t seen your vision through to the future. Understand your businesses’ timeline, environment and revenue opportunities, know your story and be prepared to take a few lumps along the way, and you’ll be the best position to acquire the funding you need to make your dreams a reality.