By Richard D. Harroch and Mike Sullivan
No matter how great your business idea is, one essential element of startup success is your ability to obtain sufficient funding to start and grow the business. While many people finance their new companies with their own capital or by borrowing money from family or friends, there are other options available. But startup founders must understand that raising startup funding is never easy, and usually takes longer than anticipated.
In this article, we review five key options to obtain startup funding for your company.
1. Angel Financing
Angel investors are typically individuals who invest in startup or early-stage companies in exchange for an equity ownership interest. Angel investing in startups has been accelerating, and high-profile success stories like Uber, WhatsApp, and Facebook have spurred angel investors to make multiple bets with the hopes of getting outsized returns.
The typical angel investment is $25,000 to $100,000 per company, but can go higher.
Here is what angels particularly care about:
- The quality, passion, commitment, and integrity of the founders
- The market opportunity being addressed and the potential for the company to become very big
- A clearly thought out business plan, and any early evidence of obtaining traction toward the plan
- Interesting technology or intellectual property
- An appropriate valuation with reasonable terms (angel investors are investing at an early stage when risk is highest, so they typically require lower valuations to compensate)
- The viability of raising additional rounds of startup funding if progress is made
There are a variety of ways to find angel investors, including through:
- Other entrepreneurs
- Lawyers and accountants
- Angel investor networks
- Venture capitalists and investment bankers
- Crowdfunding sites like Kickstarter and Indiegogo
The best way to find an angel investor is a solid introduction from a colleague or friend of an angel. Use LinkedIn to determine what connections you may already have. Angel investors are much more likely to invest if they know your sector well, so it often helps to start with your connections in that sector.
Serial entrepreneurs with successful past liquidity events are often some of the best angel investors—they have the cash to invest, but in addition to cash they also often bring other important benefits to a startup relationship, such as:
- Contacts to venture capitalists
- Contacts to strategic partners
- Advice and counsel
- Credibility by being associated with the investor
- Contacts to potential customers
- Contacts to potential employees
- Contacts with lawyers, banks, accountants, and investment bankers
- Knowledge of the marketplace and strategies of similar companies
For a comprehensive discussion of angel investing, see Angel Investing: 20 Things Entrepreneurs Should Know and 15 Expert Tips for Startups Seeking Angel or Seed Financing.
“Crowdfunding” is the practice of raising funding through multiple funders, often via popular crowdfunding websites.
Crowdfunding gives startup entrepreneurs the opportunity to raise startup funding for their business, and can help a company promote its products or services. Setting up a crowdfunding campaign is not very difficult. You set up a profile on a crowdfunding site, describing your company and its business, and the amount of money you are trying to raise. People who are interested in what you are trying to do can donate to your campaign, typically in exchange for some kind of reward for their donation (one of your products or services, a discount based on how much donated, or some other perk), or for some form of equity or profit share in your business.
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