Starting a business requires navigating many kinds of uncertainties. Startups need to take many detailed steps, including: 1) selecting a market, 2) researching customers’ needs, 3) picking a name, logo and domain name, 4) creating a website, and 5) starting to produce your offering and marketing it. In addition to time and effort, all of these steps take money.
Every new business has to think about where it’s going to get capital. When starting a business, the key is to get the kind of capital that matches the kind of business you are starting. There are two basic kinds of startups: Lifestyle Businesses and Investable Startups. Lifestyle Businesses are typically founded to generate the type of income that supports their founders’ lifestyle. Investable Startups, on the other hand, take innovative ideas and try to figure out a business model that creates repeatable sales to create a high growth, profitable company. Most Investable Startups will need significantly more capital than Lifestyle Businesses and often have to give up some equity, or ownership of the company.
Early on, most startups work from their own Personal Capital. Those funds could come from savings, home equity, and leveraging credit cards. Be careful not to overload this kind of borrowing! This might get you through your first $5,000 to $25,000. But when the needs of the business outgrow that capital, founders will need to look for more capital.
The next step in seeking capital would be Friends and Family (F&F) who might be willing to support your goals. It is both easier and harder to get money from F&F. It can be easier because they know and trust you (hopefully!). But asking friends and family to take the risk is also hard, and may not be comfortable.. You should definitely establish what kind of equity you are giving them in exchange for the funding, or when that will be determined. And you should also make sure they are aware of the risk of not being repaid. If you are building an Investable Startup, some investors may expect that you’ve already gotten Friends and Family funding. The logic is if your F&F won’t invest in you, why should they?
Your next funding source under some circumstances may be a business loan. There are many places to get a business loan, depending on your credit, the business’ assets, and your current or likely revenue potential. Most business loans, or debt funding, require collateral or something of value to borrow against. Here are some places to check out:
· Small Business Administration (SBA) works with local lenders to help small businesses find loans.
· Banks with business accounts may offer a line of credit. Each has their own rules for securing a line of credit. So check with them.
· Payment processors, like Paypal, Square, etc., offer smaller loans of $5,000 up to $50,000 that can be integrated into your incoming sales for easy repayment.
· Amazon offers some sellers small business loans, by invitation only.
· Brex is a credit card and credit line specifically designed for startups.
Another funding source where no equity is given up is crowdfunding for product development. Crowdfunding sites like Kickstarter, IndieGoGo, and Patreon let you essentially pre-sell your product. Funders get the product at a discount. You get some funds upfront. And you find out what products people are actually interested in. This can provide nice validation that there is demand for your product. Conversely, if your project is not funded, you will learn that you may have missed the mark, without spending a lot of time and money building the product. Crowdfunding can be viable for both Lifestyle Businesses and Investable Startups.
For Investable Startups, as the business gets traction and starts to scale or experience rapid growth, it will likely need even more capital to support that growth. There are funding options that require giving up some equity in the business. The first round is usually called Seed Funding. Seed Funding tends to come from angel investors. Angel investors are accredited investors who specifically like to support startups with capital, advice and time. Seed funding typically ranges from $100,000 to $3 million. Initial rounds of funding are more likely to be in the $100,000 to $1,000,000 range, with later rounds of $500,000 to several million. There are also some equity crowdfunding sites, (e.g. Circle Up, AngelList, SeedInvest, etc.) that can help with seed funding. We encourage founders to start locally though, and when you have established proof of concept for your idea and have several paying customers (or letters of intent to do so).
After seed funding, venture capital companies might be willing to invest. They typically invest in what are called Series of Rounds, such as Series A, B and even C rounds. Some angel investors may continue to participate. The size of these funding rounds varies widely, but tends to be larger than Seed Funding—i.e., $3-$5 million or more. Each successive round tends to be larger, but fewer companies secure these later rounds of follow-on funding. Recognize that angel investors and venture capital firms will be looking for an exit at some point—that is, you will be selling the company to a larger firm, or going public. This is how they get payback for their investment. This might take many years to unfold, however.
An alternative source of capital is Grants. Business grants are harder to get but can be more desirable, as they do not need to be paid back and don’t require equity. Typically, grants are targeted for a particular issue for which funding is available – like revolutionary technology, sustainable practices, or underserved founder classifications. Grants are often very restrictive. Moreover, it might be hard to find a grant to match what you want to do. There are a number of sources for business grants:
Large companies set aside dollars for specific issues they think are important and to encourage small and new businesses to work with them.
AT&T has a Foundry that works with startups to identify ways to leverage AT&T technologies.
FedEx has an annual small business grant contest that gives startups grant funding to improve their business. The winners of this contest also get discounts on FedEx services.
Visa has the Visa Everywhere Initiative that in 2020 is supporting women entrepreneurs, but its focus changes across time.
Other large companies have these programs too.
Some foundations also support specific initiatives that are important to them. The Girlboss Foundation, for example, supports women entrepreneurs. Foundation grants are most commonly available to underserved founders like women, people of color, and other minority groups.
The largest business grants come from the federal government via the SBA (SBIR and STTR grants) , the National Institutes for Health (NIH), and the National Science Foundation (NSF). All of these grants have an innovative research component with strict guidelines and competition for limited dollars. It can help to have a research partner such as a university for these types of grants.
Local and state governments also often provide grants for investments in key initiatives they are promoting – like investing in enterprise zones or supporting certain types of businesses. Sometimes these grants are in the form of tax relief.
Most grants have very specific details about who can apply, what types of companies are eligible, what innovations are eligible, and on what timeline. The deadlines and processes vary dramatically by granting source.
A startup needs to figure out what grants it wants to pursue and then start writing the grant proposal. It can take six months to a year to write a good grant proposal. There are even consultants that can be hired to help with writing the grant proposal. Few companies get a grant the first time they submit. Most grants are competitive, and there are more submissions than funds. In addition, each grant has its own peculiarities about what a good grant proposal looks like. A grant seeker only figures out what it needs to improve on after it submits.
But grants are great because they tend to be free money. They generally do not have to be repaid. Yes, you have to do the work you said you would do in your proposal. But most grants are not loans or equity investments. They are dollars that fund company activities that do not affect liabilities and capitalization. That’s why some businesses invest time and effort into winning grants.
It is hard to qualify for many grants unless you are working on high priority issues, are from an under-represented group, or are trying to innovate something difficult to accomplish.
As you can see, there are quite a number of ways to fund your business. Which one is best depends on what you are trying to accomplish with your business. For a Lifestyle Business, you might start with self-funding, launch a crowdfunding project to test the market, and build toward a line of credit. An Investable Startup might move from self-funding to F&F to get market traction, and then angel funding. If appropriate, it might even progress to venture capital.
In the early stages, don’t overextend your credit cards or take a second mortgage until you have a funding plan and some positive feedback from the market. The key is to pick the funding source that matches where you are and where you want to go. Then, evolve your funding as the business and your needs grow. Try to secure the least amount of funding you need to move to the next milestone. And wait as long as possible to give up equity.
Funding is just one of several categories of uncertainty, but it is the lifeblood that can sustain the organization to accomplish its mission. It will allow you to navigate the uncertainties around your team and employees, the product you are developing, and the customers you plan to serve. Hopefully, this gives some good guidance on how to launch your startup journey and keep sailing to success without running out of fuel and supplies!