Having enough money is crucial for the success of a startup, and insufficient funding is one of the top reasons why new businesses fail. Too often entrepreneurs underestimate the amount of money they’ll need – not just to get started but to keep running. And although you want to be able to raise the money you need, it’s not always practical or possible or even advisable to seek venture capitalist funding right away.
Nevertheless you do need enough money to get your startup through an initial period – until you are able to fund yourself or be in a position to secure a larger investment. Despite the notion that you can never really have enough funding for your business, it’s important to remember that sometimes these early investments can be quite small. In other words, you don’t need to have or ask for millions of dollars.
There are many considerations when deciding the avenue to pursue when you consider your funding sources. Do you have another source of income, for example? How might this early funding shape your exit strategy? How will it impact how future investors assess your business? There is no single universally correct answer here, it should be noted, as different types of businesses may find more or less success with different options.
Here are some of your options for early funding for your startup:
1) Self fund your startup using your own assets and equity. This can include money obtained by securing a second mortgage, tapping into your savings, and liquidating investment and retirement funds. And while it might be unwise, it is sometimes necessary to turn to your credit cards, for business purchases or to generate cash. As Bernard Lunn cautions, “remember: it will take more capital than you think.”
2) Bootstrap your business with its own revenue and without external help (including your own personal funds). In his post “The Art of Bootstrapping,” Guy Kawasaki offers these tips: Focus on cash flow, not profitability. “If you know you are going to bootstrap, you should start a business with a small up-front capital requirement, short sales cycles, short payment terms, and recurring revenue.” Don’t worry about perfecting your project. Worry about shipping your project. Keep the number of staff you employ low.
3) Ask friends and family for money. While you can choose to offer them equity, you can also simply ask for a loan. Regardless of whether it’s a loan or an investment, it’s always advisable to put the terms of your agreement in writing – even if you’re borrowing from your mom.
4) Seek angel investment. Unlike friends and family, an angel investor will ask for equity in your startup. According to a recent study cited by Liz Gannes, U.S. angel investment was up 33% in the first quarter of 2010 as compared to the same time last year. Indeed with some decline in VC funding, more and more entrepreneurs may find themselves turning to angel backers. To find angel investors, check out Venture Hacks’ curated AngelList. Look for public events sponsored by angel investors in your area and cultivate business relationships that might help introduce you to potential angel investors.
5) Apply to a startup incubator. Seed fund incubators have become more and more popular as traditional venture capitalist firms have helped organize programs to support funding and mentorship opportunities for startups. Some of the most well-known startup incubators include YCombinator,TechStars, Capital Factory and SeedCamp. If you are considering applying to an incubator program, be sure to read Chris Cameron’s advice on researching and writing your application.
Or, of course, you can skip these sources of early funding and appeal directly to venture capitalists. Good luck!