Every business needs capital to open its doors and to keep them open until it reaches profitability. According to the U.S. Small Business Administration, more than half of startups use personal funds first, and then they reach out to friends and family. Typical initial startup funding ranges anyplace from zero, to but $5,000, and up to 27,000. Cash won't solely permits startups to remain and go massive, the funding is additionally almost always a competitive advantage altogether ways that} during which among which matter: hiring key staff, publicity, marketing, and sales,” as Geoff Ralston of Y Combinator says “[However, the] quantity of money needed to need a startup to profitability is typically well on the so much aspect the facility of founders and their friends and family to finance. Thus, most startups can virtually actually want to lift cash.”3 While banks would seem to be the first place to turn, there are other sources of funding that are willing to take a chance on your startup. Investors are constantly looking for places to put their money. They know that even though startups can be a risky choice (two-thirds of early-stage investments fail to return the full investment amount), the ROI for early-stage venture capital for the businesses that succeed has averaged 21.5 percent annually over a thirty-year time period.4 That beats the average S&P 500 returns over the same period of 11.69 percent per year.5 To connect with investors and get funding for your startup, you must learn where the money is and who has it. We’ll start with the places where most entrepreneurs get their first money: themselves, friends and family, and conventional lending institutions. Then we’ll cover grants; accelerators and incubators; angel investors; venture capital firms; and corporate venture capital. Finally, you’ll learn about family offices (a source of funding that few people know about), and you’ll learn about some new and exciting ways to raise money via crowdfunding and ICOs (initial coin offerings) or STOs (securities token offerings). Depending on the stage of your company and your funding needs, you can use a combination of these sources of capital to get your business up and running. Most founders have invested their time, energy, and effort in getting their businesses off the ground. Well, investors are looking to see if you’ve invested your own capital as part of that effort. Even if you can’t put in a lot of money, any amount indicates your commitment to making this business a success. It also will be a great selling point when you approach friends and family—usually the next step in a startup’s funding journey. According to statistics collected by Fundable (a crowdfunding platform), as of 2013 close to 38 percent of all startups got some funding from friends and family.6 Now, you may be fortunate enough to have a few rich relatives (with whom you’re on good terms) who will lend you the money and think nothing of it. Or you may be more like Dominic Giancona, who wasn’t able to raise capital from his family at first, so he went to his shipmates, one by one, until he found four who were willing to invest $5,000 each in his Shaker Sleeves startup. Whether it’s easy or hard to raise money from friends and family, keep these three things in mind.
• Turning friends and family into investors can complicate your relationships with them. So before you talk with anyone, think about what will happen if your startup fails. Can your friends and family afford to lose all of the money they give you? How will you feel if they do? Make sure everyone understands the risk in this investment and that they can afford to take the hit. If not, go elsewhere for the money.
• Jamie Pennington, cofounder and co-CEO of SeeItFit.com recommends that instead of asking for money, ask for help.7 Even friends and family who don’t have enough capital themselves may introduce you to someone who becomes your investor.
• Even if it’s just a small loan from a parent or college friend to get the business started, ask an attorney to draw up a written agreement that outlines the investment amount, the terms, and whether the investor receives debt or equity. If it’s debt, include the interest rate, repayment terms, and the length of the loan period. If it’s equity, make clear how many shares or what percentage of the company they are purchasing, and when you will issue those shares.
Getting money from friends and family may signal later investors that you are willing to go to whatever lengths necessary to get your business up and running. On the other hand, when you go outside of friends and family to look for funding, you will tap into a network of investors that may provide you with leads for future rounds. It might be a reason to turn to seed-stage investors quickly. Some of the best sources for startup funding are early-adopting customers. They provide your business with proof of concept to future investors as well as the cash you need to operate today. If necessary, think of offering early adopters incentives to purchase your product or service before its release. You can use deep discounts, extra services, multiple months of subscription for free, rewards for introducing you to other customers, and so on. As you’ll see later in this chapter, offering incentives for customers who buy prior to the release of your product or service is used successfully in crowdfunding.