Does your business need funding?
What sounds like more fun than raising funding for your business? Ummm… pretty much everything, unfortunately. Let’s face it, raising money for your startup can be a tedious process. Unfortunately, it is a necessary evil for the cash-strapped entrepreneur when starting a business. Don’t worry, though. You’re not alone. It’s painful for everyone who has a startup and is looking for funding. It is all part of the process, though.
So where do you even start?
#1 Self and family funding
Most businesses are self-funded. Initially, you need access to seed money for your startup. This can be obtained through various resources, such as your family and friends, your 401K, your credit card or the equity you have in your home. This is the money that goes towards the initial stages of market research, proof of concept, and a minimum viable product. If you have a network of deep pockets, you’re golden in round one of this startup match.
#2 Angel investors
Secondly, you need to look for your angel investor. Angel investors are high-net-worth individuals who can afford to lose the money they invest in startups. Angel investment usually ranges from tens of thousands to hundreds of thousands. Currently, angel investors must have a net worth of $1 million and make at least $200k annually (or $300k jointly with spouse). So essentially, your angel investor needs to have a high net worth, and be willing to invest some of that in your startup.
Generally, if you are at this stage in the game, you have already raised some capital prior to asking an angel investor for further financing. An angel investor is typically investing in marketing, furthering your product development and investing in staffing the company. Angels do take a percentage of your business. The percentage they take depends a lot on the amount of money they invest in your business.
#3 Venture Capital (VC)
If you continue to grow your startup, there is a good chance that you will need to raise more money. The next stage is obtaining venture capital financing. This is a lucrative source of funding for startups that may not have access to capital markets. It’s a risky investment, but if the business is a success, the return-on-investment for venture capitalists can be huge. With VCs, we are talking about millions of dollars invested instead of a smaller angel round.
While “angel” may be in the name of one of your investors, they are not solely loaning you money out of the kindness of their heart. They’re going to expect something in return for their risk, understandably. Bother angels and VCs will become part owner of your company, and expect to have a certain amount of influence over the direction the company is taking. Yes, raising money for your startup comes with a price – the price tag on some of your decision-making processes. But this is the way it works. If you want other people’s money, you have to play by their rules.
#4 Initial Public Offering (IPO)
Finally, there is the IPO, raising money through public funding. At most, one out of ten venture-backed companies will have an IPO. The majority of venture-backed startups will fail and some of them will be acquired before they could even think about the possibility of an IPO.
Roughly 1,000 businesses receive their first VC funding each year, which implies only 1/6th of 1% of new businesses get VC funding. However, Since 1999, over 60% of IPOs have been VC backed.
The advantages to funding your company through this method include: gaining access to capital through selling stocks; gaining PR for your company; your shares are considered liquid equity; your stock can be used as employee incentive; and if your company performs well, generally your stock value will rise.
Going public is expensive. There are fixed and variable costs. The largest direct cost is the underwriting discount, a.k.a. gross spread. It is usually around 7% of gross proceeds (i.e. if your firm raises $200 million, the gross spread is $14 million). There are other costs like legal fees, listing fees, etc. They are mostly fixed expenses.
While raising money for your startup can be quite a daunting task, you have plenty of options to choose from.