ENTREPRENEURSHIP / MAY. 26, 2014
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How to Raise Startup Capital

No matter how life-altering and earth-shattering your idea, or product, you need money to bring it to fruition. There’s just no way around it. Luckily, there have never been more options open to you as an entrepreneur when it comes to raising your startup capital. There are six major choices (not counting winning the lottery) to consider.

Yourself, Your Family, and Friends

This should be your first port-of-call when it comes to investment. You need to demonstrate - to yourself and those around you - that you believe in your idea enough to personally put the money up, no matter the amount. If you can only swing $500, then that should be your first influx of cash. If you have $5000, or $50,000, or more, then count yourself very fortunate. Regardless of the amount, you need to be your first and primary investor. In terms of your commitment and ambition, using your own money is a clear indicator that you’re in it for the long haul. Once you’ve put your money where your mouth is - even a small amount - you should next look to friends and family. But don’t treat it as a given that they will invest. Show them that you’ve done your homework. Give them a brief pitch, clearly explaining why they should get in on the ground floor. The main advantages of dealing with friends and family are that a) you already know, trust, and like them, and b) they likely won’t require an ownership stake (or will require less) than a traditional investor. Repayment schedule and terms will also likely be more favourable, and if it works out beyond your wildest dreams, you could potentially make the people dearest to you very wealthy. A win for everyone.

Crowdfunding

Crowdfunding may be the new kid on the block, but it has already proven itself a capable and reliable choice. With it, you go after volume rather than trying to land one big fish. A crowdfunding campaign works by attracting large numbers of people to invest small amounts in your idea (maybe only $10-50 each). But it works by the sheer volume that is possible utilizing the internet and social media. In fact, it really is an experiment in social media and virality. You create a web page - usually hosted on a crowdfunding site (and there are many, each with their own strengths and weaknesses) - and you try and persuade people to donate/invest/purchase your idea. People can share your page to Facebook, Twitter, Pinterest, Instagram, Google+, tumblr, StumbleUpon...you get the idea. Through good sharing and viral content strategies, you can literally reach millions of potential investors, but no one is required to invest anything too large. Kickstarter is probably the best known, and it’s a safe bet if you have a tangible product, but there are dozens of choices out there. Look around, and check out The Basics of Crowdfunding for a bit more information.

Government Grants and Loans

Most governments have some sort of small business/entrepreneur loan and/or grant system in place. Encouraging their citizens to create, develop, and start new businesses is crucial to economic growth, and they want to make it is easy as possible. In some countries, you can get a small grant in order to start a company, meaning you won’t have to pay it back. This, of course, would be ideal. If grants are not an option, you can still apply for a small business government loan, in which case the federal/provincial/state government will act as a co-signer with you at a bank. You’ll be eligible for a higher loan amount, lower interest rate, and better payment schedule than you would be on your own. Essentially, the government is acting as a guarantor on your behalf with the bank.

A quick Google search will turn up the available options in your corner of the globe, but here are a few to get you started:

Incubators and Accelerators

These are similar, with a few marks of distinction. An incubator is usually a government-funded initiative (but not always) meant to foster and support new startups. It often takes place at a physical location, with many new enterprises sharing the space and resources (hence the name...think of it like an incubator full of baby chicks or the like). The idea is to guide and support them through to "adulthood". Startups must apply, and the competition can be fierce. Those accepted can expect physical office space and equipment, mentorship, business training, and various other support and resources that they might not have been able to afford otherwise. They also get the added bonus of networking with other entrepreneurs - both in and out of their industry - that are sharing the space. The National Business Incubation Association in the US is a great source for more information. You can also check out Ten Startup Incubators to Watch to discover some of the major players.

An accelerator, on the other hand, tends to be a private initiative. As their name implies, they are designed to speed up the entire process of startup and entrepreneurship, often getting the comparison of boot camp. Many of the programs only last 3 months (incubator programs can last anywhere up to several years). Competition is likewise fierce, with startups having to apply and be accepted. Once in, they generally receive some seed money (and forfeit some stock or ownership), mentorship, training, and introduction to investors at a "graduation" ceremony. Y Combinator in California is one of the more famous examples operating in the US today. Check out Seed-DB (international) and Startup Factories (European) for an extensive list of accelerators available to you. 

Equity Financing

If you’re looking to exchange shares/partial ownership of your enterprise for cash influx, this is an example of equity financing. You’ll be dealing with Venture Capitalists (either individuals or large firms) or Angel Investors, and you will be required to give up at least some ownership and control of your idea. Not everyone is ready to do that. Additionally, remember that equity financing is a business...these people are in it to make money. They may be ruthless, cruel, and unkind in their assessment and treatment of you. You’ll need a detailed business plan, including capital budgeting, rate of return numbers, market analysis, and insight into your existing competition and market share.

Debt Financing

If you go it alone and try and secure a bank or credit union loan, you’re working with debt financing. With it, you borrow money against some sort of collateral, and pay it back within a specified period of time and interest rate. Banks are often reluctant to issue loans to new and small businesses with an unproven track record, and your repayment schedule and interest rate will be higher than if you have a co-signer (governmental or otherwise). It’s not completely unreasonable, but debt financing should probably be your last choice. The other four options have a lot more going for them.

Finding the money to get started is likely going to be easier than you might think. That said, it is worth the time to investigate and research your options rather than just snagging the first one that becomes available to you. They are not all created equal. Depending on your particular situation (tangible vs. intangible product, ready to start producing vs. research and development time needed, time required before you might start to see a profit, personal financial history, and so on), some are ideally suited for your scenario, and others could be a disaster. Slow down and choose wisely.

 

Photo Courtesy of Pixabay

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