Angels, VCs, and More! Learn How to Secure Funding for Your Startup

May 19, 2021

Building a startup is about many things. Market savvy, innovative thinking, confidence, hard work, luck, and a bunch of other factors. Oh, and money. Let’s not forget that. Without funding for your new venture it can be extremely challenging to get your business off the ground.

That last part can be the trickiest. Even with a killer idea and the perfect business plan, you need cash to get started. Gathering financial resources is central to your future success.

Even with a killer idea and the perfect business plan, you need cash to get started. Gathering financial resources is central to your future success.

As you conceive your startup, think about how you plan to fund it. There are many sources of finance to consider. Know your options and select the one that's best for you.

What Is Bootstrapping?

Let's start by looking at the simplest option. Bootstrapping is the most self-contained of your funding possibilities. Basically, you fund the startup on your own. Then, as you move forward, you fund growth by reinvesting the profits generated by the business.

This is otherwise known as self-funding your business. You invest your own money, drawing on things like your savings or your accumulated retirement funds.

Using your own cash lets you start with a clean slate. You don't have partners to answer to and you launch your startup completely free of debt.

This freedom comes at a cost, though. Depending on the amount of cash you have, you could begin with very limited resources. In addition, the entire risk of the venture falls on you. If it fails, you lose all the savings you put into the firm.

Pros

  • No partners
  • No debt

Cons

  • You start with limited resources
  • You take on all the risk

Beyond Bootstrapping

Bootstrapping might not be feasible for you. Maybe you don’t have much savings. Maybe your idea is too ambitious. Whatever the reason, you want to raise funds in a different way.

There’s one thing you should think about at this point. As you look to begin your new venture, you need to deal with a harsh truth. Unfortunately, you're facing an uphill battle. About 90% of all new companies fail, with nearly a quarter (21.5%) going under in the first year.

Keep this in mind as you weigh your funding options. Yes, you should launch your startup with a sense of optimism. You shouldn't go into the endeavor if you don't believe you'll succeed. But manage your risks along the way.

Loans

This option lets you add to your starting capital by borrowing money. You can secure this with your assets (like with a second mortgage on your house). Or you can get an unsecured personal loan. You can even use your credit cards for some of your business purchases.

You can get these funds from a variety of locations. Traditionally, banks are the most common source of these loans. However, options like credit card companies exist as well. You could even consider less formal loans through friends and relatives (more on that later).

Loans let you increase your starting capital. You have access to cash beyond what you could provide out of your savings. This gives you more ammunition as you start to attack the market. As a result, you can usually ramp up more quickly and increase your initial size. However, there are downsides. Now you start your business with debt. You'll have to make payments on the loan and interest rates (especially for personal loans and credit cards) can get steep. Also, the lender will usually require that you personally back the loan. If that happens, you could end up owing the money, even if your business fails.

Pros

  • No partners
  • You have more starting capital than you'd have on your own

Cons

  • You have a debt to repay
  • Interest costs
  • You could owe money even if the business fails

Friends and Family

They say raising a child requires a village. Maybe a small business should fall under the same category.

You can jumpstart your entrepreneurial dreams by involving your loved ones. Turn to mom, dad, grandma, grandpa, or anyone in your extended orbit. Ask them to buy shares in the company or loan you money.

This will let you build up a healthy bankroll before you launch your endeavor. At the same time, you don't have to pass a rigorous credit check. Unlike a bank, your friends won't likely ask for a formal business plan or copies of your financial records.

There are potential pitfalls to consider. Now, you'll have to honor the commitments you make. You'll have potential partners looking over every move. Or you'll have outstanding loans to worry about.

This funding option comes with an added danger. You're risking funds belonging to people you know. If the startup goes belly up, you still have to see these people at Thanksgiving or at your next high-school reunion. You might not want to jeopardize your relationships by mixing your business and personal lives.

Pros

  • You have more starting capital than you'd have on your own
  • You don't have to pass a formal credit process

Cons

  • You risk money belonging to people you know
  • You have partners and/or debts

Angel Investors

Think of those Disney movies, where the guardian angel grants the hero's wish. In this case, your desire isn't for a pumpkin-shaped coach to take you to the ball. You want cash for your new business.

Angel investors are individuals who provide startup cash to new ventures. They take an ownership stake in return for startup capital.

These are savvy investors. They realize the risks that come with any new business. If the startup fails, they will accept their share of the loss. You likely won't have a lingering debt to pay or have a strained relationship with someone close to you.

However, you will have a partner in your new endeavor. You'll have obligations to your investor as you ramp up your business. And they will enjoy some of the profits if your idea proves a success.

Also, convincing an angel investor requires a certain skill set. You'll have to prepare in advance of any pitch and polish your presentation abilities. This goes beyond talking your Aunt Mary into helping you out. As such, you might have to build up a viable startup before turning to an angel investor for additional capital.

Pros

  • You have more starting capital than you'd have on your own
  • Someone else takes part of the risk
  • You are usually dealing with a single individual

Cons

  • You have a partner
  • The process is more formal than dealing with friends and family

VCs

Venture capitalists are a little higher up the food chain from angel investors. They basically perform the same function - providing capital to new businesses. However, VCs are the corporatized version of the angel investor.

As such, VCs are usually looking to make sizable investments. If your dream is to open up a family restaurant or found your own landscaping company, you likely won't find a venture capitalist to take your calls. They usually make investments of more than $10 million (and often well more than that).

Otherwise, many of the same pros and cons from the angel investor discussion apply. You'll have to deal with a partner. Also, if anything, the added scale will make the process even more formal than dealing with an angel investor. You might have to work through the corporate bureaucracy to ensure that the funding goes through.

But if you can swing funding from a VC, you'll have a good base to start operations. You'll have significantly more money than you could gather on your own. And you've split the risk of failure with someone who can afford to handle that possibility.

Pros

  • You have more starting capital than you'd have on your own
  • Someone else takes part of the risk

Cons

  • You have a partner
  • The process is more formal than dealing with friends and family
  • VCs are usually looking for sizable investments

Choosing the Right Funding Option for You

There's a myth about startups. We often conjure visions of the rugged, pioneering entrepreneur, building a startup out of a garage. We imagine bootstrapping as the most common way most new ventures enter the world.

Whether you apply for loans, talk to your family, or seek out a formal investor, you can build the perfect financial base for your startup.

Don't believe it. There are certainly advantages to self-financing your small business and keeping it free of outside influences and encumbrances.

However, there are other options. Most name-brand companies received a financial boost along the way. Mark Zuckerberg got cash from a friend to start Facebook. Richard Branson borrowed money from his mother.

You can use some of the same tactics. Whether you apply for loans, talk to your family, or seek out a formal investor, you can build the perfect financial base for your startup.

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