Few things are more frustrating than working hard to launch a business and then realizing you lack the funds needed to keep going. Raising startup capital isn't easy, especially for aspiring entrepreneurs. In fact, nearly one-third of new businesses fail because they run out of cash, but there are ways to secure funding — you just need to think outside the box and reach out to the right people.
Why Is Startup Capital Important?
Starting a small business isn't necessarily expensive. A company that offers consulting services, for example, doesn't need much to get off the ground. However, its costs will increase if its owner decides to hire more people, launch software programs or open new offices. Capital requirements are significantly higher for companies that develop or manufacture physical goods.
Either way, raising startup capital is crucial for business growth and survival. Anyone can start a company, but few are able to keep it afloat. Startup capital is the fuel on which a business runs during its first months or years. As an entrepreneur, it's your responsibility to find investors who are able and willing to support the development of your small business or products.
Before researching your options, make sure you know exactly how much money you need and how you're going to use it. This is something you need to think about when you draft a business plan. If your business fails for some reason, investors will lose their money. That's why they need to ensure you have a viable business or product idea supported by a well-thought-out execution strategy.
Startup capital can pay for business licenses and permits, product development, marketing campaigns, equipment and more. Generally, financing comes from angel investors, venture capitalists or private lenders. You may also reach out to traditional banks, but they're often tight-fisted when it comes to small-business loans. Crowdfunding, equity and lines of credit are all potential options.
Ask Your Friends and Family
Many times, the first check comes from family members or friends. These people know and trust you, so they may offer a helping hand. However, you cannot count on them forever. Your capital requirements will increase as your business grows.
In the worst-case scenario, you may end up losing those friends. If, say, a friend gives you $20,000 and your business fails, you may not be able to pay him back. This could ruin your friendship.
Think twice before asking your friends or family members for startup capital. Consider borrowing a small amount of money from them — just enough to get your startup off the ground. Be honest with them about the risks involved. No matter how great your business idea may be, something could go wrong along the way.
Seek Angel Investment
Angel investors are wealthy individuals who invest money in startups and small businesses with growth potential to get a return on their investment. In 2015, U.S. startups received $24.6 billion from angel investors and $59.1 billion from venture capitalists. However, angel investors closed a whopping 71,000 deals, and venture capitalists closed 4,361 deals, reports the Angel Capital Association.
These findings show that most startups are funded by angel investors. Small businesses specializing in software development, health care and commercial services have the greatest appeal. Beware, though — angel investment is a double-edged sword.
On one hand, it provides you with the funds you need to take your startup to the next level. On the other hand, the business isn't really yours anymore after the investment is made. Soon, you may realize that you no longer have the freedom to set your own goals, work at your own pace and decide everything by yourself. Those who invest in your business may act as if you're a simple employee and boss you around.
Most angels seek to multiply their investment by five to 10 times, so you need a solid business plan to prove you're worthy of their attention. Before approaching investors, make sure your startup has a credible growth story and can be scaled for growth. Reach out to other entrepreneurs, attend business-networking events and consider joining the following online platforms to find angel investment:
- Angel Capital Association
- Angel List
- Golden Seeds
- TiE Angels
- Angel Investment Network
- Tech Coast Angels
- Social Venture Circle
Reach Out to Venture Capitalists
Venture capitalists are either individuals or professionally managed firms that invest in companies with high growth potential. In general, they seek small businesses or startup ventures that wish to expand but are too risky for traditional bank loans or standard capital markets. They typically focus on companies that develop innovative products or technologies and can generate high returns at an early stage.
The thing is that these investors rarely fund startups that are at the very beginning of their journey. Instead, they seek companies with viable product ideas that are ready to hit the market. Venture capitalists buy a stake in these firms and then take an active role in the companies in which they invest. They not only receive a percentage of the profits but also pool money from insurance companies, pension funds and other investors that act as limited partners, which allows for an exponential growth of compound interest.
As you would expect, venture capital funding isn't ideal for small-business owners who want to retain control of their operations. After an investment is made, venture capital firms obtain voting and veto rights and have priority in terms of compensation in the event of a stock sale. If you decide to pursue this path, make sure you have a viable product idea, a solid founding team and customers before reaching out to venture capitalists.
Get a Small-Business Loan
One way to raise startup capital without losing control of your business is to apply for a loan. Again, it's important to have a well-thought-out business plan before taking this step. Banks and lenders need some sort of guarantee and may check your credit score, annual revenue, net operating income, financial projections and accounting records. Therefore, you need to be organized and over-prepared.
Have a detailed plan for using the money. Lenders will want to know how the loan benefits your small business and how you're planning to use it, whether it's for capital investment, equipment purchases or hiring new talent. If your company isn't yet turning a profit, consider applying for a personal line of credit. In this case, it's important to have a good credit score and a strong credit history.
Another option for raising startup capital is to get a small business loan through the U.S. Small Business Administration. The organization doesn't offer loans, but it connects business owners and startup founders with potential lenders. SBA-guaranteed loans often have lower fees and interest rates than traditional bank loans. Additionally, they may not require collateral and have more flexible terms and lower down payments.
If your startup doesn't qualify for a small-business loan, consider crowdfunding. Online platforms like Kickstarter, Indiegogo, Patreon and CircleUp helped thousands of entrepreneurs raise startup capital and bring their vision to life. This option works particularly well for nonprofits, community-oriented projects and products with mass appeal. It can also be an effective marketing tool and can help your small business gain exposure on a global scale.
- CBInsights: The Top 20 Reasons Startups Fail
- Angel Capital Association: Angel Investment in the U.S. - Trends and Best Practices
- Forbes: The 10 Commandments for Startups Seeking Angel Funding
- BDC: 9 Steps to Finding Angel Investors for Your Business
- Reverb Advisors: How Venture Capitalists Make Money and Why It Matters to You
- Inc.: 6 Steps to Get the Attention of Any Venture Capitalist
- U.S. Small Business Administration: Fund Your Business
- U.S. Small Business Administration: Loans