I’m often asked about advice on funding startups. I generally start my response with a quick review of what has changed since the “good old days”. Years ago individual entrepreneurs, provide they had reasonable credit, maybe some collateral, and a solid business plan might be able to find funding at the neighborhood bank. Even prior to the recent recession, those days are long gone. So are the prospects of thinking that we can take our startup business plan pitch across the country to a variety of venture capitalists, searching for the one ready to write the biggest check. Sorry, that’s not going to happen.
So how are startups funded these days?
The most succinct answer to that question is to say that entrepreneurs these days need to be prepared to launch their companies and at least demonstrate an effective business model and the ability to attract customers and make money – without the support of lenders and investors.
Ouch! There, I said it.
In today’s economy, entrepreneurs may typically progress through the following hierarchy of funding sources:
Personal Funds (Bootstrapping)
Bootstrapping simply means stretching what little capital an entrepreneur may be able to assemble from personal funds, selling his/her “stuff” on eBay – whatever amount of money can be cobbled together before approaching others. For me, at least, that also includes any income that the fledging startup may be producing, plowing those profits back into the operation.
Family and Friends
No, this isn’t a suggestion – it’s an essential step in the process. Think of it this way, if the people who know you the best, love you the most, trust you and clearly understanding your capabilities – if those people won’t invest in you, why in the world would you expect a perfect stranger to do so? It just doesn’t make sense. Having said that, that’s not to suggest that we are talking about huge sums of money. This “seed money” will simply help us get things going, so that we can move on to the next step.
Crowdfunding and Micro-lending
Over the past few years, many students have come to me thinking that crowdfunding may be a panacea, with donors scouring websites like indiegogo, Kickstarter and RocketHub for projects worthy of donations. Pretty simple, no? No! Statistics have shown that less than half of all crowdfunding projects are ever funded. And of those who are not successful, almost two thirds don’t even achieve 20% of their goal.
For a successful crowdfunding campaign, the “why” is always more powerful than the “how”. Keep in mind that, at least for now, crowdfunding depends on donations, and those donors want to give money to something they believe in. What you give them in return as a thank you for their contribution will also determine if they will tell others about your project.
Check out micro-lending sites like PROSPER: http://www.prosper.com/ and PAVE: http://pave.com/
Before reading any further, please refer back to “family and Friends” above. Don’t expect an angel investor to drop in and share their halo with you. But doing some detailed research and exploiting all of your network connections could well get you in front of local investors who will at least hear your pitch. But don’t even bother going if your business model is untested or if your presentation is not top notch. You’ll be wasting their time and yours.
Other Equity Financing
The JOBS Act will eventually pave the way for equity crowdfunding, but that is still in the future. Do some research, though, and get familiar with the provisions of this important legislation.
At the start of this post I began by letting you know not to depend on banks to loan money to unproven startups, so don’t bother even asking. BUT banks do loan money for traditional things – vehicles, buildings, equipment purchases or leasing. With sufficient down payment, reasonable credit and solid collateral, such as with a vehicle loan, banks may still be able to help, but not for a loan to start the business, itself.
So if you are looking to fund a new startup business, walk through the process and steps above. You might just get lucky.