You have cleared the first step: you have a great idea. Now you just need to find a lot of money to get it moving and you’ll be on your way to fame and fortune. However, banks have been traditionally reluctant to give loans to startups. Like everybody else, they know that 90% of them don’t succeed. If banks are not an option, where can you turn to? How can you finance your startup? You could try some of these…
This is my personal favorite. Not every idea is suitable for crowdfunding. But if you have something that you think should appeal to the general public, crowdfunding sites like Kickstarter (donations for creative projects), Indiegogo (anything goes) or Crowdfunder (more serious investment) are a great way to finance your startup idea.
They are your testing grounds. You have to make your idea sexy and make people want to buy it. And you have immediate feedback. The greatest thing about these sites is that you can raise the money with no strings attached, except that you should make good on your promises. You can even sell thousands of products before you have even begun producing them.
Look for an angel
If the investment you need is between a hundred thousand and a million dollars, angel investors are the best choice to finance your startup. They stand somewhere between your family and venture capitalists (more on both later). Many of today’s giants, including Google, started up with their help. They are useful because they aren’t in it only for the money, but often act as mentors because they are interested in the industry, providing connections and advice.
Finding angels used to be a matter of luck. But what started as personal initiatives of retired entrepreneurs has turned into groups and finally into group networks (hosts?), which are easy to look up. The amounts are generally smaller than the VC funds, but you get less stress and more help. They will expect high rates of return, however.
Find venture capital
While angels invest their own money, venture capitalists invest the money of others. They won’t accept high risks like angels do, so they are a good solution if you’re already making money from your idea. If you are growing fast, you can get several millions of dollars to make your growth even faster.
On the flip side, venture capitalists don’t like to wait. That is precisely the reason why they love quick growth: they want to get their returns and exit within seven years at most.
Contact online moneylenders
Kabbage, OnDeck, CAN Capital, IOU Central… They lead the new generation of lenders that will give you money faster than anyone. They use their own algorithms to determine your credit worthiness. If they decide you can be trusted, you can get a loan in a few minutes to finance your startup.
Such easy money can be seductive, but think twice before rushing into their loans. Whether offline or online, moneylenders have high interest rates and aggressive payment terms. You will have to repay them on a daily basis.
Let the government pay you
This is a great way to raise clean money if you meet certain requirements. Both the US and the EU offer a wide range of grants for small businesses that do research or scientific work.
The downside is the fact that you are dealing with a red tape behemoth. As a rule, there are dozens of administrative hurdles you need to jump over before actually getting the money. And there is always the very real possibility that you will spend several months filling the paperwork and waiting in offices only to be rejected in the end.
Work your ass off
This is the solution for very courageous people or for lonely wolves: raise the money yourself to finance your startup. Bootstrapping doesn’t have to be a waste of time, as you can use your specialized knowledge to be a consultant in the same industry. You’ll build a reputation and find connections that can help you with your startup.
A less interesting alternative is to have a full or part-time job that isn’t related to your startup. If that’s the case, at least try to use the best time of the day to nurture your love child.
The great advantage of bootstrapping is that you don’t have to answer to anybody. But it is a slow way to raise money. Working on two tracks is exhausting and may lead to giving up the startup idea altogether.
What else are you doing when you are asking your friends and family for money? You may delude yourself into thinking you convinced them with business arguments, but it’s simply not true. They aren’t motivated by an interest in your business, but by an attachment to you.
Yes, it’s the cheapest way to get money to finance your startup. They won’t ask for interests and they’ll be infinitely patient. But there are other kinds of risks involved. The emotional cost of alienating someone close to you may prove to be more disastrous than bankruptcy. As Jonathan Swift said, “A wise man should have money in his head, but not in his heart.”