Much has changed in the way business startups are funded. Of course the old joke still applies: banks will offer to loan you money only when you can prove to them you don’t need any. When you have a multi-year track record of running a profitable business, solid financial statements, a great credit score and plenty of collateral, you might be able to get a bank loan. The problem? You need money NOW, not years from now.
But the other illusion of funding new businesses is the idea that a venture capitalist or angel investor will listen to your pitch and hand you a big check. No, it doesn’t work that way. In fact, it has been my experience that most startups these days are launched through a combination of personal funds, family and friends – something we typically refer to as “bootstrapping”. The upside is that we are our own boss and haven’t given up any equity. The downside, of course, is that our funds are both limited and completely at risk. But for a startup, that can be a good thing.
Taking the “lean” approach to launching a business has little to do with funding. Rather it is a customer-centric, iterative approach that relies on customer feedback in order to craft a viable business model. But typically a byproduct of the lean approach is a cautious, self-funded start for the business. Of course, if the business model is successful and the startup gains traction, we can then use the cash flow to fund future growth.
Once our business is off the ground and our business model has been tested, we can then look to outside investors, if necessary, to fund the next stage in the company’s growth and development. Recent legislation in the form of the J.O.B.S. Act will soon allow for equity crowdfunding, a change that may provide an exciting new option for small business funding. Watch for updates as the rules and regulations are released later this year.
Looking for the best source to fund your new startup? First, look in the mirror.