You are working hard to build a business and bring a product into the world. And now, you need to find the best way to take your product to the next level and usually that involves funding.
Funding can be an intimidating or daunting experience. So we’ve put together 4 proven ways to get a startup funded and help get a product out into the market.
1. Loans
One option for funding your business is through a loan. There are two types of loans to consider:
1. Friends and family: Yes, you can borrow from them! Sometimes you have a family member or friends who have resources and would be open to supporting a great idea. This can be an ideal situation because you don’t have to go through the formal paperwork or hoops of doing a formal loan.
Pros:
- Personal: Ideally, you have built trust over the years of knowing each other. This should make it easier to communicate and have conversations about the ups and downs.
- Quicker loan process:. Typically, borrowing from a friend or family member will likely have a lot less paperwork and legal review than other options, making it a quicker process to receive the funds.
- Involvement: Sometimes, people want an opportunity to help their friends/family but they don’t know how. If someone is in a financial position to lend money, this could be a good avenue for them to participate with the people they care most about.
Cons:
- Lack of experience: A friend or family member might not actually have experience in business. So if you have questions or need mentorship, they usually will not be able to provide this.
- Risking a relationship: Borrowing from a friend or family member can be easy if things are going well, but you might risk your relationship if your venture fails. Money is often a hard subject for relationships, so make sure you consider this if you borrow from a friend or family member
2. Small business loan: Most cities and towns have a Small Business Association that can get them connected with a loan for their startup. This can be a great way to get your funding all at once. An SBA (or other bank) can give you a loan at a fixed interest rate.
Pros:
- Clear conditions: A bank will give your business funding with very clear conditions of interest rates and payment requirements.
- Resources: They will also often provide general resources for information, networking, and mentorship.
- More freedom: A bank is less interested in the day-to-day decisions of your startup and much more interested in making sure that they get a return on their investment. This means that you have more control over your actual team and the direction that your start-up takes.
Cons:
- Proof of viability: One challenge with acquiring a small business loan is that takes a lot of paperwork and proof of the profitability of your business. Banks don’t like taking risks on startups that might not work, so they will also want to see a proven history of your sales and success before they consider funding you.
- They are conservative: You might need to show what you will do with each dollar that you are provided because banks tend to be more conservative with what they fund. So not only do they want to see a history of experience, they also want to see a clear business and fund allocation plan from your team.
- Angel Investors
An angel investor, (often called an angel) is an individual with private wealth who usually is passionate about funding causes that solve a big problem in the world (while also providing a return on their investment). An angel will usually fund a startup in exchange for a percentage of equity in the business.
Pros:
- Experience: Angels are great to have on your team because they often provide a lot of experience and business connections. Especially, if they have direct experience in the market or business you are in.
- Support.:Angels can also be one of your biggest champions. They will often serve as your mentor and guide in navigating the startup world – as they are financially invested in your success.
- Funding without interest:An angel will allow you to receive funding without having to pay back any interest as you would have to do with a traditional loan.
Cons:
- Strings attached: Just like any relationship, you want to make sure that you find the right angel. Even though an angel is virtually on your team, they also want to see a return on their own investment. They will take part ownership in your company and will definitely have some of their own interests at hand.
- Loss of control: In exchange for angel funding, you will also have to give up some control of your company. Because an angel will actually have a stake in your business, they will also have some decision-making power in terms of the direction of your startup.
- Involvement (even if you are not seeking it): Angels have a higher tolerance for risk and failure, but that also means they have higher standards. An angel could push your limits in terms of the diligence and efficiency of your team. An angel can be a great way to fund your startup, but you should have someone who is truly interested in your idea and is on your team in helping to make it happen.
3. Venture Capital
When most people think of startups, they think of venture capital. A venture capital firm is a group of professional investors who look to support the most profitable ideas and highest potential entrepreneurs with the aim of making large gains back on their investment.
Pros:
- Scale: If you have a big idea and are willing to give up some control in exchange for a large amount of funding and connections – venture capital might be the right avenue for you. Venture capital firms usually only fund products that have a potential for a very large scale and a large return on their investment.
- Support: A venture capital firm is like a well-oiled machine. They have connections, systems, and mentorship to help entrepreneurs take their businesses to the next level.
Cons:
- Giving up equity: In order for a venture capital firm to spend the time and resources investing in your business, they want to see a big upside in the financial return. This usually means taking a chunk of your business equity in exchange for their involvement.
- Loss of control: Similar to angel funding, you are giving up some control of your company and business decisions by choosing the venture capital route. While venture capital firms provide a lot of resources and connections, they are also invested in receiving a large return back and therefore can be very involved in your business if they don’t think you’re doing a good job.
4. Crowdfunding
Crowdfunding provides an opportunity to go directly to your customers to raise awareness and money for your business. In addition, sometimes entrepreneurs use crowdfunding first, and once they have proven the market demand – go on to raise money through venture capital firms (at much better terms) for the next phase of their business.
Pros:
- Keep creative control: In many other funding models, you will need to adhere to investors helping you direct your business to maximize their return on investment. In crowdfunding, you can definitely listen to others and get advice, but you still keep creative control on your business.
- Reach your audience right away.: Crowdfunding allows you to reach your audience right away and get their honest thoughts about your product. It also provides an avenue to directly connect with and build a community.
- Market validation: Crowdfunding is one of those rare avenues where you can validate your product before you manufacture and ship it at scale. This allows you to apply feedback into new product features and validate what’s working, or not working, with your business.
Cons:
- Time and effort: It’s important to say that crowdfunding takes work! You will have to tell a really great story, and make sure that you have a plan, outreach strategy and a great community around you to reach your funding goal and bring your idea to fruition.
- It may not work: There is no guarantee that you will get your funding goal. Sometimes you will find that your idea is actually not that interesting to the market. So if you choose the crowdfunding route, you’ll have to be prepared for honest feedback from your customers.
Now It’s Your Turn
We know that raising money can be intimidating, but hopefully these 4 ways shed some light on the pros and cons of raising money through different avenues.
Whichever avenue you take – we’re excited to see what you will bring to the world!
Interested in crowdfunding? Learn more about why Indiegogo is the right platform to bring your idea to market.
