Starting any company can be challenging, however the quick growth and turnaround times frequently related to entrepreneurial ventures include their very own particular group of challenges. You’re entering a fast-paced and cutthroat segment of the economy with both high risks and high rewards. To start your trip as an rising entrepreneur, you’ll need to take stock of your financing options.
If your business plan prominently features explosive growth, a liquidity-rich exit strategy, or perhaps dpo (IPO) within five years approximately, this information is for you personally. For other prospective business owners who are looking to build something on a smaller scale, we've your back with some broader helpful information on entrepreneurs.
Why Financing Can Be Hard For Entrepreneurs To Find (& Why That Shouldn’t Stop You Anyway)
Entrepreneurs face a few serious obstacles for you to get financing, but when it were easy more people would be entrepreneurs, wouldn’t they?
The biggest concern is, obviously, risk. You are taking a massive one by starting a new, unproven business. More than 50% of startups fail. Those aren’t great odds for that more conservative lenders available, so right from the start, you’re likely to be dealing with a smaller pool of lenders than is available to established businesses.
Related to that particular is the fact that bank consolidation has resulted in fewer traditional lenders, meaning fewer opportunities for funding. Losing community banks, in particular, has already established a negative impact on lending. Online lenders have partially stepped into the void, however, many are centered on very short-term lending.
In particular, the high growth startup model (though much romanticized in the media) is rarer than you might think. Fewer than 1% of businesses successfully raise investment capital.
Finally, social barriers ranging from prejudiced lending practices to geographic power of resources can greatly affect your chances of getting financing.
That said, “difficult” doesn’t mean “impossible.” With some creativity, diligence, and relationship-building, you’ll have a very good shot at overcoming the chances.
6 Kinds of Financing For Entrepreneurs
Now that we’ve gotten the cautionary tales out of the way, it’s time for you to take a look at some kinds of financing entrepreneurs can tap.
1) Venture Capital
If any funding source is becoming more closely related to entrepreneurship in the public than investment capital, it might be news to me. There’s a particular mystique to being successfully being funded by groups that believe your company idea might take off.
Venture capital firms pool money from sources ranging from wealthy visitors to banks to pension funds. Each firm has a tendency to focus on a specific industry or type of company. Once they’ve raised an agreed-upon amount, they’ll look around for businesses in which to invest.
A investment capital fund frequently disburses its funding during the period of several “rounds,” the first of which is called the seed round. Because the name implies, this funding is meant to get the business off the ground. Successive rounds, called series, may become available as the business grows. Series A funding, for example, enables you to scale up a company that's already offering a product and it has a customer base. Series B funding is similarly focused on growth. Finally, Series C funding concentrates on helping mature companies expand into new products, or perhaps acquire others. Different venture capital firms have a tendency to focus on specific phases.
Pros
- Specialized Financing: Venture capital firms develop some expertise in the industries they’re investing in, which may be handy if you need advice.
- Well-Connected: The venture capital circuit is pretty small and interconnected. Once you get your grip, it is possible to use their connections to your advantage.
- Eager To Work With Startups: Where lots of lenders are reluctant to use businesses who have little more than a concept and a plan, venture capital firms might take a risk on big ideas.
- No Debt: While you are quitting equity inside your company, you don’t have to worry about “paying off a loan.”
Cons
- Geographic Concentration: The majority of investment capital supported startups have been in California, Massachusetts, Ny, and Texas. Some states don't have any active venture capitalist firms. Even inside the states that do, they’re frequently concentrated within a few cities (Bay area, New York City, Boston, for instance). That doesn’t mean you can’t get venture capital funding elsewhere (Cincinnati, Salt Lake City, and Atlanta all have some VC activity, for instance), but there’ll be fewer firms in the mix.
- Loss of Control: Accepting investment capital funding means quitting equity inside your business. In some instances, it may even mean quitting some decision-making capacity to the firm.
- It’s Just Hard To Get: As mentioned earlier, fewer than 1% of startups successfully raise venture capital. For all the hype VC gets, it’s actually a really small part of the business funding picture.
2) Angel Investors
Though sometimes used interchangeably with venture capitalists in casual conversation, angel investors aren’t quite the same thing. Whereas venture capital usually involves a firm aggregating funds from the a few different sources, an angel investor is an individual–typically wealthy–who's searching for a risky venture having a potentially high rate of return. Just like a venture capital firm, an angel investor is usually searching for equity in your company in exchange for funds.
While word-of-mouth is still a typical method of getting connected with an angel investor, in the last decade approximately there have been attempts to form networks of investors through hubs like AngelList and ACE-Net. Some angel investors even pool their resources and performance just like a venture capital firm.
Pros
- No Debt: You’re quitting equity in your business rather than taking a loan.
- Eager To utilize Startups: Whereas banks might be wary, angel investors are looking for the type of investment opportunity a startup can offer.
- You Simply need to Convince One Person: While this is not always an advantage, you are able to hone your pitch towards the investor rather than having to worry about a committee evaluation.
Cons
- Loss Of Control: Again, you’re giving up equity which can also mean loss of decision-making power. With private investors, there may also be an added risk of lack of expertise, that can bring us to …
- Potential Lack Of Expertise: Unlike venture capital firms, an angel investor may not be intimately acquainted with your industry or product.
3) Debt Financing
For brevity’s sake, we’re combining loans from banks, microloans, online loans, and personal loans. While you will find advantages and disadvantages to each of these, in the end, we’re still referring to taking on and servicing debt in return for a lump sum of money. While it’s difficult to get a loan before you’ve established a stable source of income, it’s not impossible, particularly where programs like microloans are worried. These programs provide relatively small amounts of cash with reasonable rates of interest and long term lengths that may give you lots of time to get the business ready to go.
Pros
- Retain Control: You’re not giving up any equity to some third party.
- Flexible Exit Strategy: You’re on your own timetable for selling or making an IPO.
- Building Credit: If you manage to service your financial troubles regularly, it’ll make getting funding later on easier.
Cons
- Interest: Your debt earns it and you have to pay for them back. This is often a drag on your growth in the future.
- Risk Of Default: Starting a company is risky, and there’s a really real chance you won’t be able to pay your financial troubles. If that happens, you’ll want to know how much personal liability you've, along with the effect it’ll have on your credit.
- Borrowing Amounts May Be Low: You’re probably looking at five-figure amounts or less when it comes to loans that are offered to startups.
4) Bootstrapping
Another financing strategy is to not seek outside financing at all. That means dealing with your personal savings and resources and going for a lean, minimalist approach to your company operations. When you do hit a growth phase, it’ll be funded by your business’s own revenue.
Pros
- Retain Control: You don’t owe anyone anything, so you've complete treatments for business decisions.
- Your Business Strategy Matters: You’ll only grow in case your model works.
- No Obligations: You have no debt or third-party timetable to adhere to.
Cons
- Lack Of Funds: There’s a reason the old cliche “you’ve reached spend money to make money” persists. You may run into roadblocks that may be removed by money you don’t have.
- Slow Growth: You won’t have the ability to scale quickly, which might put you in a disadvantage for those who have competitors.
- Time Investment: You’ll likely have to defend myself against tasks you’d otherwise be able to delegate if you had employees.
5) Crowdfunding
Among the newer ways to get a startup off the floor would be to crowdfund it. Crowdfunding is usually associated with pre-purchasing products, but some newer services are offering so-called “equity crowdfunding.” As the name implies, you’ll give up some equity inside your company in return for funding from the pool of investors.
Pros
- No Debt: Crowdfunding doesn’t come with any debt obligations.
- High Funding Amounts Possible: Crowdfunding can be a guessing game, but when it really works, the hauls can get pretty big.
- You Don’t Need to “Know The Right People”: If you’re not socially connected to wealthy investor networks, crowdfunding can be a way to still raise large amounts of equity financing.
Cons
- Loss Of Control: You’re giving up equity, which means you may also be giving up decision-making power.
- Crowdfunding Campaign: Crowdfunding needs a sustained effort to get eyeballs on your business.
- Platform Fees: Crowdfunding platforms need to make money too, so expect to be some type of fee or to ask them to take a cut from the funds you raise.
- It’s Still New: Some investors are still wary of equity crowdfunding.
6) Grants & Subsidies
Most parts of the country have programs in position made to encourage entrepreneurship. These can take the type of tax incentives, subsidies, grants, or some kind of infrastructural support. You should familiarize yourself with those that apply to your kind of business and take advantage of them when you are able.
Pros
- Free Money: While grants and subsidies will come with obligations, they aren’t debt or even loss of equity.
- Builds Local Connections: Becoming a pillar of the community, as they say, can open up additional opportunities in the future.
Cons
- Can Be Time-Consuming: Grants, particularly, have involved, competitive application processes that may require a large amount of your attention.
- Obligations: Accepting this kind of help may come with strings attached. You might be expected to stay inside a certain city or county for any certain number of years or hire X-number of employees.
Entrepreneur Financing Tips From The Experts
What better source of advice is there than people who have successfully undertaken exactly the same journey you’re going to attempt?
Make Sure You Really Want Angel Investment
Entrepreneur Tim Berry, founder of Palo Alto Software and bplans.com, cautions founders to make sure they actually need and want angel investment prior to seeking it out. If you don’t require it, you’re best without them.
Believe Inside your Vision
In a chapter from the Jordan Harbinger Show, angel investor Jason Calacanis says he can tell when a business owner believes in their own individual vision and when they’re bluffing, an art he compares to playing poker.
Getting A VC Firm’s Attention Is Part Of The Interview
Marc Andreessen, co-founder of VC firm Andreessen Horowitz, says that a founder’s capability to network their way into a conference having a venture capital firm is a great barometer for his or her capability to forge other important business relationships, such as those with customers, suppliers, as well as the media.
Understand The Motivations Of Your Potential Investors
Scott Kupor, author of Secret of Sand Hill Road, advises founders to think about how much of an investor is hoping to get out of their relationship using the startup. The best investor would be the one whose objectives align with your personal.
Get Started On Your Entrepreneur Financing Journey
You had your vision in position. Now you have a feeling of the way you might finance it. If the odds seem daunting, remember that the rewards will also be great.
None of those options sound appealing? Take a look at some additional ways to finance your startup. And if you’re seeking to finance smaller, short-term expenses for your business, you’ll wish to check out our top business credit card choices for startups.
