Most businesses require a significant investment of money to get started. As you’re mapping out your business plan and looking at the money you’ll need to launch your venture, you may be wondering where you’ll get that money from. Your savings account and Roth IRA will only take you so far. The good news is that there have never been more options for startup fundraising. In this post, we’re looking at four excellent options for who to pitch for funds to start your venture.
1. Friends and Family
Friends and family are a great place to start when you’re ready to start a business. These people have invested in building a relationship with you, they know you (strengths and weaknesses), and they want to see you succeed. A foundation of trust already exists.
But there are also pitfalls to fundraising from friends and family. Because they aren’t experienced investors, they may misunderstand their role in your company, thinking they’re entitled to give you advice — and have you take it. They also may have unrealistic expectations for how soon they’ll recoup their investment. If you choose to fundraise from friends and family, be sure to set expectations and clearly outline what you want the relationship to look like.
2. Angel Investors
An angel investor is an individual (or group of individuals) providing capital to a business in exchange for an equity position in the company. Typically (but not always), angel investors have “accredited investor” status with the SEC, with a net worth of at least $1M in assets (not including personal residences), or have earned $200k in income for the previous two years, or having a combined household income of $300k. Angel investing is attractive to high net-worth individuals because they can receive a tax credit for their investments.
If you’re just getting started, an angel investor may be an excellent source of seed funding. Unlike venture capital firms, angels are willing to invest in companies in their early stages, and they bring more to the table than do VCs. The benefits of angel investors are many. Beyond funding, they are actively involved in helping startups grow to the point of profitability, including offering mentorship and expert guidance. They also come with a network of valuable connections that can help you as you grow your venture.
Startup grants come in all types: federal, state, local, and private. Each of these grants focuses on a specific type of startup that they want to offer support to. For example, The SBIR grants funds to small businesses engaged in research and development with commercial potential. NASA offers a grant for startups specializing in energy efficiency or alternative/renewable energy or creating more efficient ways of building spacecraft. Here in South Carolina, we have SC Launch, which supports advanced technology startups in the state. You might be surprised how many grants are available to startups. Check out a list of 107 here.
Crowdfunding is a great option for those who already have an audience. Maybe your company has been in existence for a while, and you’re now launching a new product. Or maybe you’ve built a social media following, and you’re creating a product to meet a need of your followers.
Crowdfunding comes in three primary types: donation-based, rewards-based, and equity-based. In donation-based campaigns, donors receive nothing in exchange for their donation, and you don’t have to pay them back. This type typically only works for nonprofits or other groups whose goal is community development.
Rewards-based crowdfunding is best for startups. With this type, you offer your funders perks or rewards in exchange for their contributions. Each level of contribution receives a specific perk, with the value of the perks rising with the contribution amount. For example, you may offer a behind-the-scenes video, a branded t-shirt, or a free first version of the product.
Equity crowdfunding is where funders become shareholders and receive equity in your company. This type of crowdfunding comes with a mountain of legal requirements that you’ll need to carefully follow. For example, you’ll need to abide by voting requirements and dividend rights.
Ideate Funds to Start Your Venture
There’s no reason you have to pick just one option for funding. In fact, you’ll probably choose different options or different combinations of options at each funding stage you go through as a startup. Brainstorm ideas for how you could make each option work, and do some online research using the resources we’ve linked to so you can see what’s available to you.
Want to learn how we help startups think through all the angles of their idea, including funding? Ask about our SolutionLab workshops.