Startups face many challenges. The one challenge they have in common is the need for money. Successful startup CEOs share their experiences and opinions about the different ways of funding a startup.
Liza Minelli sang, “money makes the world go ’round.” That is true, in general, but for businesses in particular. Startups are especially vulnerable because, without money, they will not even get off the ground. Therefore, funding a startup is a top priority.
That said, there are many ways to go about funding a startup. The trick is choosing what, when, and from whom. Successful startup CEOs have been there and done that, so they are a good source of advice.
There are two basic types of funding: internal and external. Internal funding includes personal wealth and profits. External funding includes donations, crowdfunding, banks, and venture capital. Let us take each one in turn.
This type of funding involves using personal wealth or savings to start and sustain a business. A startup will continue to operate as long as it can draw on personal funds. It does not even have to make a profit.
Also known as bootstrapping, this method assumes the business is already operational. It uses the profits of the company itself to keep going. Most startup CEOs agree that this is the best method to fund a startup, at least in the early stages.
According to Hernan Sias of Business Bros, working with a limited amount of money “pushes you to be creative and efficient.” It forces startups to figure out a way to make it work by going as lean as possible.
The best part about bootstrapping is the business owes nothing to anyone at the end of the day.
InnovateHER KC CEO Lauren Conaway believes the best method of funding a startup is “through multiple revenue streams.” In her case, she acknowledges her dependence on member donations, which is a form of external funding.
Another popular form of donation is crowdfunding. Both Hernan and Mixtape CEO Joel Johnson agree that crowdfunding is an excellent way to get funding. Hernan points out that it tells you “you have a viable product that people are willing to buy from you.”
KC Hemp Co. COO Kyle Steppe did not use crowdfunding but still thinks it is an excellent idea depending on the type of business.
Full Scale CEO Matt DeCoursey calls it a “product-centric” method of funding. With enough support from the community, it can make the business viable. Lauren says it works because it “gets you people’s buy-in…they feel invested in it.”
A common way that startups raise capital is to take out a bank loan. Lauren says it is a good idea if you can get it at low-interest rates, and Kyle agrees. He likes the idea of not giving up any equity but advises to pay it back as quickly as possible. However, Hernan believes debt-financing puts too much pressure on the borrower.
Matt uses a different approach to raising capital through loans. He calls it venture debt, which he describes as “creating your own loans and then finding people to lend money that you then pay a return on.”
The benefit of venture debt is that you have more control over the loan and debt servicing terms. Of course, it requires knowing people and organizations that will lend you money.
Venture capital or VC is money a business receives in exchange for equity or ownership shares. Some people believe that accepting venture capital is like making a deal with the devil, but that is not true. Many CEOs think venture capital can open up opportunities for many businesses.
Matt claims, “these kinds of funds and firms are set up to try to help you be successful” and “can drive a whole lot of money, input, connections, assets, and resources…to make [business] grow at a light speed.”
Kyle agrees, saying, “I’ve got a lot of different business plans that would require a lot more than just bootstrapping.” Lauren chimes in, “With the right investor, who has values that align with yours? It can be a really powerful, fantastic thing.”
Moreover, venture capital is an excellent way for startups to show that they have made it. Venture capitalists demand definitive proof that a business is viable before giving any money. A startup that raises VC money is validation that it has achieved success.
This is the reason many founders focus on getting VC money. A company backed by venture capitalists receives the most attention.
However, it is essential to remember that taking VC money means giving up equity. You have to be sure you want to go down that route.
The nature of the business will determine the need for additional funding. A good example is a startup that has to wait 90 days for payment. It has to have enough cash to cover expenses in the meantime.
Ironically, Hernan says that the best time to get external funding is when a business is flush with cash. He points out that “ain’t nobody going to lend you any money” if you struggle to make payments. His advice is to anticipate when you might need funds but get it when the books are in the black.
Kyle has another perspective. He says that the best time to get external funding is when “you are ready to grow and scale your business.”
That makes a lot of sense. However, startups cannot simply walk up to lenders and investors and ask for money. As mentioned earlier, banks and VCs look for proof of sustainability, which is not always easy for startups.
Great Advice for Funding a Startup
Funding a startup company involves many factors. Successful startup CEOs agree on the benefits of external funding for growing a business. However, they also emphasize the importance of taking stock of your situation before making a decision.
Funding a Startup Requires Proof
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