Once you have decided your business needs money to expand, the next question is how to best do that. And there are many, many different ways. Methods like crowdfunding attract a lot of attention because it’s the latest and newest and attracts the social media buzz. But traditional methods may still be a better fit.
1. Personal savings
Personal savings allow you to keep full control of your business – meaning your shareholding isn’t diluted. “Bootstrapping” with personal funds is something just about all company founders have needed to do at some stage.
It’s riskier than raising outside capital, because it’s your money at stake, but because of that you’ll probably be more careful. Doing more with less is a valuable discipline, even once your venture has grown far beyond the need to bootstrap. Another disadvantage is bootstrapping may slow down your growth; sometimes you really do need money to grow rapidly, and if your personal resources are not large, your frugality may be a hindrance to your venture’s potential.
Still, you do need to show some commitment. One of the first questions that outside investors will ask is: “how much have you personally invested?”. Your answer shouldn’t be “nothing”.
2. Family and friends
One step beyond your own personal resources are the resources of family and friends. They know you, they can see your passion, and they may back your idea on more favourable terms than those more removed from you.
Always put terms into writing. Just because you have a close relationship with family and friends doesn’t mean the agreement can be too informal. Even if they don’t insist on it, you should. Perhaps your family or friends think of a cash contribution as a gift, more than an investment – if that’s the case, that’s fine, but make it crystal clear what (if any) shareholding they gain.
Also consider the worst-case scenario and whether you and they are prepared to go through that. Losing the capital of financial investors will not be a fun experience, but losing the money of family and friends can be downright miserable if it ruins relationships. Can you handle that prospect?
3. Government grants
Generous government grants are in place to help foster entrepreneurship and jobs. In my opinion, they are the most-underappreciated of all early-stage company financing options. They are often overlooked as founders find it difficult to navigate all the various programs that are out there; grants can be available from both local and central government, and from many different agencies.
Some programs come with strings attached and you should definitely make sure you understand these before signing up. But in many cases, government grants are literally non-diluting free money. The government doesn’t become a shareholder, and doesn’t expect you will repay the money in the future.
4. Bank loan
Borrowing money to grow your company costs in interest repayments, but this interest may end up being a lot cheaper than giving up a large piece of equity in your company at a low valuation.
It is rare for companies to get bank financing at the seed stage, because they can’t offer enough security for the bank to become comfortable. Instead, you may be asked to personally guarantee the loan against other assets you have (such as your house).
Personally guaranteeing a loan means you’re effectively doing the same thing from a risk point of view as using your personal savings – in both cases, the loss in the event of failure is yours to bear. Whether you are comfortable with this or not depends entirely on you.
Any time a company is founded with more than one person, different founders bring different things to the table; you can have a programming co-founder, a marketing co-founder, a business-development co-founder… and you can have a financial backer as a co-founder too.
Those who contribute money instead of day-to-day work are known as “silent partners”. However, the best silent partners in early-stage companies are not silent! The best silent partners will help by determining the strategic direction. Or maybe they’re half-silent, working on the business part-time, but contributing extra capital. The possibilities are only limited to what is acceptable to all parties at the time of the company’s foundation.
6. Incubators and accelerators
Depending on the quality of the program, the experience of being in an incubator or accelerator statistically increases the chance of a start-up surviving. Many founders find the environment of being around other start-ups to be invigorating, and these programs tend to facilitate a lot of learning in a short amount of time.
Incubators and accelerators usually require founders to apply and commit to relocating themselves from the premises for a set period of time. For some, this can be disruptive to operations.
The amount of capital they can offer is usually quite low and companies needing several hundred thousand dollars to expand already-proven businesses will need to look elsewhere. But incubators/accelerators can provide can help get a “foot in the door” with financial investors who have deeper pockets.
7. Financial investors
Once ideas are proven, models are tested and customer interest is engaged, you may be ready for “angel investors”, “venture capital” or “private equity” – specific terms for a more general category we can group together as “financial investors”.
Before approaching financial investors, you should understand how much money they tend to invest in each company. Many are simply not interested in smaller deals – if they’re used to investing $10 million at a time, and you’re seeking $10,000, you won’t get very far. Basic information such as this, along with their past investments can usually be ascertained from their website.
Financial investors reject the vast majority of companies that come through their door, do deep and time-intensive due diligence and negotiate hard on valuation and terms.
On the upside, the companies they work with gain a valuable partner, who will contribute much more than just their money.
8. Rewards crowdfunding
Rewards crowdfunding does a great job of validating that your product has demand, and raising money to make it happen – without getting into debt or giving up a stake in the business.
But rewards crowdfunding is far from easy. Anyone can launch a Kickstarter campaign, but not anyone can close one with a meaningful amount of money raised. When you hear of companies raising hundreds of thousands, or millions, through rewards crowdfunding, remember that these are the exception and not the rule. You’d do well do get advice from campaign managers with a track record.
9. Equity crowdfunding
Equity crowdfunding looks and feels like rewards crowdfunding, but with an important difference. Those that pledge become owners in the company, rather than buyers of a pre-ordered product. Equity crowdfunding gives strong publicity benefits, can give a company a large number of strong shareholder advocates, and tends to raise more money than rewards crowdfunding deals.
Equity crowdfunding is a lot of work, but this process in itself is great for strengthening company governance and having a lot of people provide feedback on your business model.
Not every one of these forms of financing will be open to every company. But weigh those options that are open to you carefully – and remember always that which one you choose will have a big impact on your company beyond the money you raise.