Bill Clark is the CEO of Microventures, a securities broker/dealer that uses crowdfunding to allow investors to invest between $1,000 to $10,000 in startups online. You can follow him on twitter @austinbillc.
Raising capital can be the hardest step in launching a startup. You can be passionate about your idea and convince a lot of people that it will be the next big thing, but it takes the right person to ask for money and close the deal. Here are five options to explore.
1. Friends and Family
People like to invest not only in the idea but in the person. You are turning to the people who know you the best, and because of that they will be more inclined to invest in you. Most often, money from friends and family is the first round of financing. It will give you the funds you need to get your startup off the ground and create a value for the next round.
There are some negative sides of having your family or friends invest in your company. A high percentage of startups fail, and there is a risk of losing both your friend’s money and the friendship itself. Family reunions can become more about what the startup is doing than it is about catching up with people you care about. I recommend that you only take money from people that you know can afford to lose it. Be clear about the risk upfront.
2. Incubator Funding
If you can get your startup into an incubator program like Y Combinator, TechStars or 500 Startups, you will get more than just money. While the amount of money that you get might be small, say around $20,000, the mentorship and guidance is worth much more. Over the course of a few months, you will have access to some of the smartest people in the startup world, and they will give you advice on how to take your company to the next level. You will also be a part of a huge network that can help you get in front of potential customers and partners. At the end, you will have the opportunity to present in front of angel investors and venture capitalists to start working on your next round of funding.
3. Preferred Stock
Startups generally offer preferred shares when they raise money. Common stock is typically given to founders and reserved for options. The reason to offer preferred shares is that they often come with provisions like rights and liquidation preference. They are also senior to the common stock. This will make the investment more attractive and assure the investor he or she will be paid out first. After all, they are some of the first people to put up money to help your startup succeed.
4. Convertible Debt
Convertible debt has gained popularity in the last few years thanks to its success with Y Combinator startups and the fact that SV Angel and Yuri Miller have offered every Y Combinator startup $150,000 in convertible debt. When an investor offers a convertible note, the debt is converted to equity sometime in the future. This conversion is at a discount to the next funding round that you raise and typically has a cap, which means that if you raise a huge round, the debt investors have protected themselves from getting diluted.
Convertible debt is popular because you don’t have to set a valuation. It is handled in the next round of financing. Also, convertible debt often requires less paperwork, which means you can keep your costs lower. A lot of investors don’t like convertible debt as much because the valuation of the company is an unknown at the time of investment.
5. Venture Funding
A startup venture fund pools investments from many limited partners and then manages that money by investing in startups that meet the objective of the fund. When you are looking to raise money from a venture fund, you often already have a working prototype and measurable traction in your business. The amount of money that these funds invest is typically a lot more than angel investments.
Since these investment could be more than $1 million, the venture capitalist is often looking for a board seat to gain some control over their investment. Venture capitalists usually like investments in earlier stage companies to be in the 20% equity range. If you decide to try and get venture funding, it’s important to keep in mind that venture capitalists only offer terms to 1 or 2% of the deals they see. Be ready to do a lot of pitching.
There are many other ways that you can fund your startup, which include your own credit card, vendor financing, crowdfunding, grants or business loans, but the five listed here are the most popular funding options. You will need to look at all the options to see what is available for your business and then figure out the right fit for your company.
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