By Rebecca Reimers and Will Stabler
Financing is a critical component of any business, and there are many paths to raise capital. In this week’s column we are going to look at the various options for financing both small and growth businesses.
Before deciding how to raise capital, it’s important to identify your long-term goals, as different forms of financing provide different opportunities for your business. If you’re looking to scale your business, you might choose an aggressive tactic that will grow the company faster. If you have a small business or are a solo entrepreneur, you likely want to grow more slowly and maintain full ownership.
First, we’ll look at bootstrapping: funding your business with your own money alongside revenues. Bootstrapping requires quick customer acquisition to finance the continued growth of your business. The upside is founders aren’t beholden to investors or debt payments and can set their own vision and priorities. Drawbacks are slower growth than with a capital infusion and, potentially, a more limited ceiling for your revenues. Crowdfunding uses a reward- based system that reduces risk for the entrepreneur. Imagine an apparel business that wants to try out a new item isn’t certain it will be a hit. The business is faced with a large minimum investment in inventory. With rewards-based crowdfunding, supporters of the brand commit to prepay for the product. If enough supporters join the effort, the capital minimum is met and the company makes the order with the funds. This model typically does not dilute ownership in your company. Crowdfunding campaigns can give access to early adopters of your product or service, and these customers can be ambassadors or beta testers. Crowdfunding platforms do charge fees, and the initial setup can require significant time.
Equity crowdfunding — selling pieces of your company to a large number of people — is an option, too. This avenue is more complex and requires the help of a business lawyer.
Grants for private businesses are often available for specific product types or underrepresented entrepreneur groups. Grants are a great way to raise nondilutive funds, meaning that they do not dilute the company ownership. Grants are often aimed at funding the development of new technologies and can be awarded by both government institutions and private foundations.
Conventional business loans from banks and lending institutions are widely available, and there are several debt products that you can use to finance your business, from a line of credit, to equipment financing, to term loans and more. The U.S. Small Business Administration and other government agencies may offer the most attractive low-interest loans, so entrepreneurs should evaluate each type of loan by the same standards.
With a loan, you don’t have to give up company ownership, and the range of products can be tailored to your needs. Financing can happen quickly, but loans must be paid back, and late payments can be costly. Some lending institutions will require collateral in the form of personal assets, which can bring added risk.
Angel investors are wealthy individuals who invest their own money in a startup in exchange for a portion of company ownership. In addition to providing a capital infusion without legal stipulations on spending, angels can be advisors to help grow your company. Keep in mind you may dilute your ownership stake further if you continue to raise money through angels or venture capital. If you have many angels, they may have conflicting advice and priorities, and managing them all may be onerous.
Raising venture capital is a significant endeavor that can bring large amounts of capital to your business in exchange for relatively large slices of your business’s ownership. VC firms pool funds and have employees that make and support investments. Larger amounts of capital allow companies to hire employees and secure long-term partnerships and agreements. VC firms become a strategic partner, making introductions to advisors, employers, customers and other investors. Nearly all private companies valued at $1 billion or more have raised money from VC firms.
But VC funding is hard to acquire. Firms will want to see strong growth potential in a large market, as they need to see a path for a return on their investment. You will forfeit a large percentage of your ownership by raising VC money, and consequently, a percentage of your business’s profits. Lastly, most VC firms demand that they have some level of operational control, like placing certain members of your board of directors and veto power over certain decisions.
The means of choosing to raise capital is a big decision for entrepreneurs, and Silicon Couloir has various programs that can help guide the planning and strategy at all stages. Start-Up Success, which will be offered in April, provides a foundation and helps to identify your goals. Our expert TEAMS mentors give guidance to determine the best form of financing. Our annual Pitch Day competition awards prize money and helps entrepreneurs hone their pitch to angels and VCs alike. Finally, our Angel Group connects entrepreneurs to local investors.