Doing Business | Financing

December 28, 2012

Start-up Funding: Where to Start

What's the best source of capital for your company? Every option comes with pros and cons, so weigh them carefully.

My digital marketing company recently decided to start mentoring other start-ups. I've done a bit of this informally over the years but I decided to make it more official and actually incubate another venture--I know how much mentoring helped me in the early days of Ciplex. In the process, which you'll probably hear more about in future posts, I've been reminded of the importance of getting the funding question right. It's too easy to simply assume your first task is to pitch the nearest VC--when venture capital might be the last thing your company needs.

To get more insight, I recently spoke with some funding experts: Malcolm Cowley, founder of buy.at and Performance Horizon Group; Matt Winnick, managing partner of Endgame Partners; and Slava Rubin, founder and CEO of Indiegogo.

Self-Funding

I reached into my own pockets when I decided to start Ciplex. Whether you have ample assets or don't believe in borrowing money, there are many reasons to self-fund. Cowley pointed out what is probably the most appealing reason: You remain completely in control of your business. You can make all the decisions and are free to do as you please.

But it comes with a major risk entrepreneurs often overlook. If you go the self-funded route you may miss out on the valuable guidance of experienced venture capitalists, Cowley says. It's just you and your potentially insular way of thinking.

Friends & Family

If you have a group of confidants among your friends and family who are willing to help with some of your expenses, this can be an appealing option. It's probably the option on this list that offers the most flexibility and patience. Winnick warns, however, that borrowing from your loved ones requires strong relationships to weather the inevitable ups and downs and not ruin your next Thanksgiving.

Crowdfunding

Crowdfunding--potentially one of the best new tools helping the economy--lets just about anyone make a difference by contributing money to the innovations and businesses they feel deserve it.

One of the greatest things about crowdfunding is its ability to validate an idea within the marketplace, which is an essential step to determine the future of your business, says Rubin. But be realistic: It's more complicated than simply slapping together a Kickstarter or Indiegogo page. Understand that a successful campaign requires a significant amount of time and dedication to get the backing you need--and then to fulfill the orders you've promised and not squander the good will you've garnered.

Sweat Equity

Although easily overlooked, exchanging a share of ownership for someone's contributions is a form of funding. It certainly isn't appropriate for every business, but like other options, it comes with its own pros and cons.

One benefit of sweat equity is that you don't have the pressure of someone else's funds driving your expectations. Also, if you succeed, you still retain the largest possible share in your venture. The obvious drawback, of course, is that this isn't the route to cold, hard cash upfront and it's unlikely to jumpstart your growth.

Angel Investors

If your company doesn't need a large round of funding, an angel investment may be more appropriate. You'll retain more day-to-day control of your business than you would with VC funding. Cowley recommends first investigating what kind of visions and ROI goals potential angels have, and make sure your own goals align.

Venture Capital

The world of venture capital offers larger amounts of funding as well as access to a plethora of resources. Every start-up can benefit from mentorship from highly connected and intelligent individuals, Winnick says. But not every entrepreneur is comfortable giving up some control and strategic vision in exchange. Make sure you are before you pursue this route.

Government Grants

Because this form of potential funding is generated by tax dollars, expect lots of rules governing who can apply. In most cases, federal and state governments don't provide grants for simply starting a business, although you may qualify for research and development grants.

Bank Loans

At one time, entrepreneurs often started their search for funding at the bank. Good luck with that nowadays. Post-recession, the lending climate is still extremely tight for first-time business owners. Many choose to take out a personal loan and line of credit if they cannot receive one in their business name.

Accelerators And Incubators

Accelerators and incubators are a great way to get young businesses off the ground--all while gaining access to resources and mentorship. Typically, an accelerator acts as a jump-starter for your company, offering work space, mentorship, and a modest cash investment. Incubators are good for entrepreneurs who are still fleshing out a business idea, as they usually include a longer period of time to get your feet on the ground, Winnick says.

Choosing the right funding for your business shouldn't be just a shot in the dark. When I was starting my company, I spent a significant chunk of time weighing funding options before taking the plunge--and you should too.

Text by Inc.
 

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