— April 29, 2019
When it comes to launching a startup, there’s no magic formula or template that you can follow. While there are plenty of ‘how to’ articles out there and dozens of entrepreneurial gurus sharing their wisdom, everyone’s journey ends up looking a little bit different.
This is especially true when it comes to funding your new venture. While it might seem like all your entrepreneur friends are out there courting wealthy investors, hunting down “angels” is not the only way to finance your new business. Indeed, while there’s no right answer to the question of how to get funding for a startup, there are some important steps you can take to make sure you end up with the cash you need.
Below are four easy steps that you can take to secure that oh-so-important funding.
Perfect that Business Plan
If you ask any serial entrepreneur how to get funding for a startup, they’ll probably ask you about your business plan. While having a business plan may seem like a formality or just another administrative task to check off your to-do list, it’s actually a vital tool for securing funding for your startup.
A business plan essentially acts as a roadmap that lays out all of the components that you need in order to grow sustainably. This includes everything from your team, to your marketing and sales strategy, to your product or service itself. While no business plan is ever set in stone (and shouldn’t be), a business plan does provide a good ruler against which to measure your successes and failures.
Moreover, a business plan will also come in handy when you kick off your fundraising efforts. Not only will it help to explain what your business does, but it also offers concrete data for your current numbers and your projections for future growth. Whether you’re trying to raise funds from investors or even your close friends, a business plan backed by data gives you credibility as an entrepreneur and demonstrates the potential of your startup.
Do Your (Financial) Homework
When you first launch a startup venture, you want as much cash as possible, as quickly as possible—who wouldn’t? However, simply asking for the highest number you can think of isn’t going to get you very far.
Instead, take the time to actually know your numbers inside and out. This means calculating your expenses before start talking to lenders and investors. Start by thinking about all the costs involved in getting your business off the ground and begin building a first-year budget from there. This might include things like the cost of company registration, hiring a good lawyer, or bringing on your first employee.
But don’t simply stop at your initial costs. Go further and make projections about your customer acquisition cost, your retention rate (churn rate), customer lifetime value, and more. Sure, some (probably all) of these numbers will change, but having ballpark figures can help you determine how much money you actually need to fund your startup.
Research Your Options
Once you have a plan and an idea of how much money you need, it’s time to actually start fundraising. But before putting all of your eggs in one basket, it’s important to know the different funding options available to you:
1. Friends and Family
Borrowing money from friends and family is one of the easiest ways to get funding for a startup. Unlike banks and investors, they know you personally and know how passionate you are about turning your dreams into a reality. Of course, this route also means putting your personal relationships on the line, so keep in mind that things could turn sour down the line.
2. Small Business Loans
There are some banks and government agencies like the Small Business Administration that can provide loans to help you get your business off the ground. While these loans can be the boost you need to get started, make sure you’re well aware of the terms attached to the funding before you sign on the dotted line.
3. Venture Capitalists
If loans aren’t the best fit for your business, you may start looking for money from a venture capitalist (VC). A VC is a person or firm that invests money in small companies using funds pooled from investment companies, large corporations, and pension funds. In most cases, VCs do not use their own money to invest in companies. As a result, VCs tend to invest based on a risk/return ratio, so they are generally the better fit if your startup is already established.
While VCs are great for securing large sums of money, they are generally looking for a return on investment that’s anywhere from 25% to 35%. You also have to be willing to part with some equity in exchange for that hefty sum of cash.
4. Angel Investors
Unlike VCs, angel investors use their own money to invest in small businesses. Angel investors are often more focused on building a successful business than turning an immediate profit, making them a great source of funding if you’re just starting out. The drawback is that angel investors may end up being more of a mentor than a steady source of funding. And of course, angels generally want equity or some sort of control over how your business is run.
5. Startup Business Grants
Perhaps the best source of funding is grants for startup businesses. These kinds of grants are essentially a free source of startup funding that doesn’t require you to give up any equity. If you choose this fundraising route, federal government grants for startup businesses such as the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs are an excellent place to start. However, these programs can be highly competitive, meaning you may want to also consider state grants for startup businesses or even corporate startup funding grants.
But of course, nothing in life is really free, so keep in mind that grant funding is highly competitive and often comes with strings attached in terms of how you can spend the money.
If you’re not ready to give up equity or take out a loan, you can always use your own funds to get your business off the ground. This money can come from personal savings, low or no interest credit cards, or even mortgages and lines of credit on your home. Of course, it goes without saying that if your business fails to get off the ground, you could end up with some substantial debt that you’ll need to manage, so always bootstrap with caution.
Get Your Financials In Order (Before You Need Them)
If you’ve made it this far, you probably have a solid business plan and a clear idea of what fundraising route (or routes) you’re going to pursue. But before you begin asking for cash, it’s important to make sure you’ve got your financials in order.
Even if you’re in the early stages of launching your business, making sure that your bookkeeping is up-to-date gives you credibility, as well as logical and quantifiable guidelines to back up your business decisions. Many startup founders think that their priority should be building a great business first, and dealing with the back-office admin over time. However, not having things organized from the start could mean missing out on key funding opportunities.
It’s also worth noting that if you’re a more established startup going the investor route, you can expect these financial-savvy folks to conduct due diligence. This means that they may hire accountants to comb through your numbers and ensure everything is up to snuff. VCs want to make sure that they’re making a sound investment, so it’s better to be prepared for their digging than to be caught off guard and forced to explain your numbers. And remember, if you don’t feel confident handling your financial data on your own, hiring a bookkeeper or accountant can always take that worry off your plate.
At the end of the day, securing funding for your startup is a little bit like getting your drivers license for the first time. Preparation and practice are essential because, when your skills are (literally) put to the test, it’s up to you to make things happen. It’s your startup and you’re the one in the driver’s seat.