How equity crowdfunding is changing the startup game. Forever.
There is a serious hunger in the start-up community for financing dreams that simply cannot be met by all the angels and venture capitalists. With the continual emergence of new technologies and an evolving business landscape, new financing methods such as Equity Crowdfunding are offering entrepreneurs and investors incredible new options to funding and investing in new business ventures. Never before have investors had the opportunity to get great returns and invest in innovative ideas with such ease.
We’re going to explore the 10 best options available to fund a start-up.
Top 10 Ways to Fund a Start-up Today
1. Your Savings: This is the only truly free way to fund a new start-up in terms of retaining equity and eliminating fees. If you really believe in your idea, you should be willing to take the risk, allocate your savings, and sell your investments in the pursuit of your own success. Investing in yourself is the most powerful way to put all you’ve got on the line and never give up. While living without an emergency fund is not smart practice in the long run, nothing motivates an entrepreneur more than seeing his/her own hard-earned money disappear toward pursuing a passion. Most importantly, if you expect to bring on other investors or secure loans later down the road, they’ll want to see that you’ve taken the risks to put a lot on the line.
2. A Second Job: Getting a second job will not only increase your income, but will show the world how serious you are about your new startup. We recommend picking up extra hours at your existing job or doing freelance consulting in your off time. While you’ll drastically cut down on arguably your most important resource, time to work on your business, you will be generating an elevated level of income that will motivate you to keep pressing on.
3. Friends and Family: Going to your friends and family to fund your startup is consistently regarded as one of the best ways to raise money. Whether you’re offering equity in your company to these close investors, or simply taking a low (or zero) interest loan, this route can quickly turn sour if you’re not careful. It can often lead to the strain or breakdown of relationships if your business fails and investments cannot be returned. When accepting funds from friends and family, be very clear to your investors when engaging in this relationship that there are risks involved and the possibility exists that their investment could be lost.
4. Equity Crowdfunding: equity crowdfunding is a brand new investment asset class that allows start-ups to raise funds through secured online platforms, in a place that gives them access to a very large number of interested investors. The best part is that anyone (over the age of 18) can invest. This concept follows the same principle as traditional crowdfunding websites such as Kickstarter and IndieGoGo, where an individual posts a project with the details of the business, a video description, and various numbers of compensation levels. However, traditional crowdfunding provides no actual return on the investment to investors. Equity crowdfunding takes a very unique new twist to this: Start-ups now can offer equity and returns to investors instead of needing to create different types of compensation packages like most crowdfunding campaigns do now. The advantage of offering equity to investors online is that you’re able to take in funding without immediately obligating yourself to providing that investor with X number of products by X date. Rather than using crowdfunding solely as a pre-selling tool, equity crowdfunding gives entrepreneurs an often more attractive option, and provides investors with (the possibility of) an actual return on their investment. Websites like truCrowd.com are leading the way in this burgeoning new industry, where investors can earn exceptional returns by funding great ideas.
5. Traditional crowdfunding (pre-orders): Websites like Kickstarter and IndieGoGo have sprung up within the last few years, offering entrepreneurs the opportunity to fund their new business ideas by, more or less, collecting pre-orders from people around the world. While this is an awesome way both to generate cash flow to get your business off the ground and prove the marketability of your business, these websites lack the ability for the “backers” to experience any financial gain for their contribution. Kickstarter explicitly states in its Guidelines that the website cannot be used to sell equity or solicit loans, eliminating the opportunity for “backers” to become true “investors.” Crowdfunding remains a very powerful tool, especially in the age of social media with how rapidly information is shared and disseminated across the Internet.
6. Credit Cards: While this can be a very dangerous tactic because of the possibility of plunging into serious debt without a clear way out is very real, there are certainly some benefits to this funding route. One of the biggest benefits of using credit cards to finance your startup is that you’re able to defer payment and pay small monthly minimums towards your balance (at the expense of interest rates that average from 13-16%). While you’re paying a hefty price to finance a business this way, for some entrepreneurs this may be one of the only viable options.
7. Small Business Loans (Banks): Going down to your bank and securing a business loan, while often marginally more difficult to secure than a new credit card, does give you the added benefit of dropping your effective interest rate down to an average of 7-8%. If you pass the test, you’ll likely be making higher monthly payments to your bank than what credit card minimum payments require, but you’re getting access to the funds you need at about half the cost.
8. Seed Funding (Incubators): Startup incubators like Y Combinator invest small amounts of funding (usually around $20,000) into early-stage start-up companies and bring them to a central location to work together as a team, and receive mentoring and help, in exchange for a small amount of equity in the start-up. The biggest benefit of working with an incubator is the advice and strategic partnerships you get out of the deal.
9. Angel Investors: Angel investors are high-net-worth individuals who either invest independently in early-stage start-up companies or have come together and formed angel networks such as Band of Angels and Tech Coast Angels. The benefits of opting to go with an angel investor or accept funding from an angel network, is that you’re going to get an investor or investors willing to roll their sleeves up and help put their money to work with you. Angels typically only invest in companies with which they have very specific domain experience, so you’re likely to get someone who’s had success in your industry in the past, which is a huge plus for a growing start-up.
10. Venture Capital: VC firms are companies that invest money for other, large institutions (think insurance companies, pension funds, and high-net-worth individuals) and provide healthy returns to their investors. VC firms typically only invest at later stages in the company’s life, in order to mitigate risk and average investments that are in the millions of dollars. Their investment approach is usually very long-term and they work hands on with the entrepreneurial management teams in order to build value for the businesses in which they invest.
There are many options available to entrepreneurs looking to fund their new startups, and it’s all a matter of evaluating where you are at, what your goals are, and which route is the best fit for you right now. If you can’t bootstrap your start-up and you need to seek outside investment in order to bring your idea to market, make sure you choose the funding method that provides you with the most value and least risk.
The fact remains that financing methods like equity crowdfunding are paving the way to making fundraising much easier for entrepreneurs worldwide. Check us out at truCrowd.com today and learn more about how you, too, can easily get equity funding for your start-up.
Also, please feel free to add to this list and share with us any experience (good or bad) with any method of financing. Coolness and awesomeness, Thank you!