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Financing For Start-Up Businesses
Start Ups Grow with Financing
Start Up Financing Basics
There are several ways to finance a start up business. Securing capital for a new business is a very challenging endeavor. Financing for a new venture can be achieved through self investment or seeking outside investors deciding to take on large amounts of money. Regardless the path, financing for a start up business will consume large amounts of time and energy for an entrepreneur and so it is wise to think through the various options that are available for early stage fundraising.
The most common methods of securing financing for a start up include:
- Boot Strapping - Self Funded
- Friends, Families, Fools - The 3 F's
- Angel Investors
- Venture Capital & Private Equity Investors
- Corporate Investors
- Banks & Credit Cards
Self Funding - Financing for a Start Up Business
Almost every entrepreneur is the first investor in their early stage start up business. As a business founder you believe in your ideas and are likely to not only put in a lot blood, sweat, time, and energy, but also cash to pay for all of the initial elements of running a business. Early expenses likely will include: incorporation, setting up a website, initial product development, marketing collateral, transportation for sales meetings, and much much more. Just getting prepared to meet with sophisticated angel and venture capital investors requires a significant investment in a start up in order to be successful, which is why most entrepreneurs quickly reach out to people that they know that believe in them and are likely to provide financing for this initial stage of the company.
Self Financing Strategy
Entrepreneurs are generally risky and optimistic individuals at heart and so considering to take out a loan on a house or fill up credit cards to the max in order to self fund a start up business is a viable option that many small business owners have done. While it can be successful this is a very risky decision. With failure at this stage being so high and the personal risks associated to using your own home as collateral and personal credit cards as an ATM for the business can lead to situations that become very difficult to dig out of. Use these methods at your own risk and be very conscious of the position you are putting yourself into. Going into significant debt to develop the product or to go out and try and market the business is very different from going into debt to fulfill a customers order. When the time is right using credit cards and simple bank loans may make sense for your business, but be careful. Banks are not in the business of acting as angel investors and will not take on the risk of supporting your business unless you have collateral to back up the financing such as a home.
Friends & Family - Financing for Start Ups
Friends, family, and fools tend to be the first outside individuals that a start up founder will reach out to raise capital for the company to continue operations and prepare for formal investor meetings. These are people that you have a close relationship with or know that may be interested in supporting your idea for a piece of pie if you make it big. At this earliest stages many small businesses fail and do not make it to maturity. So it is very important to educate your friends and family that your company has risks and that while you would appreciate there support in financing your business you do not want to take more money than they are comfortable losing. Taking large amounts of money from family and friends is likely to lead to future problems that as a business owner you do not want to deal with. It is best to use a little bit of friends and family capital if you can not bootstrap all the way to formal investors, but it should not be to fully finance your operations unless the capital requirements are very minimal.
Angel Investors - Financing for Start Ups
Most start ups that are successful will eventually raise a seed round of financing from angel investors. The typical angel investor is an independently wealthy individual that prefers to invest in businesses related to their industry of expertise. There are angel investors that focus on just about every type of industry and so depending on the business you are trying to finance seek out an investor that has a compatible background. Most angel investors make initial investments between $25,000 and $250,000 and will likely be an active investor meaning that they will play a role within your company on some level. Some angel investors will take a position with a company or a board seat to help with strategic business development or assistance in raising additional capital from other investors. There is a wide array of resources available for entrepreneurs seeking to raise angel funding for their business.
Venture Capital, Private Equity, & Corporate Investors
Start ups that require financing in order to facilitate large scale growth or complex product development will require significant funding well north of a million dollars will need to seek financing from institutional investors such as venture capitalists, private equity firms, and corporate investors. This is generally not occur in the very early cycles of a start up business unless the founding team has prior relationships and has aligned the product / service and company to fit with the demands of these types of investors. Most entrepreneurs will be better served to focus on developing a solid business that generates revenue that supports there goals to raise angel investments versus chasing the larger investment firms for financing.