[Scunizzo]

After the success of our last YoungEntrepreneur.com poll on The Top 20 Startup Mistakes that entrepreneurs make, we're ready to get our new poll started!

This time I want to talk about raising money. It's been said that there is no such thing as a startup with too much money. You need capital to invest in sales, marketing, staff, offices, research, etc.

Every business needs some startup capital so my question to you is what's the best way to raise money?

[cnarcisse21]

I would say the best way to go about getting capital is to first start on your own. Whether your working or can get money from friends and family, you should try to get as much "in-house" as you possibly can.

From there develop your product/service as much as possible by yourself while entertaining the idea of acquiring additional capital. If your serious and looking to scale go the VC/Angel route.

While being an entrepreneur is about the unknown and uncertainty, the more planning and prepared you are for future situations the less you put yourself at risk. That includes VCs/Angels who may want more equity or stake in your company than you. The more you are able to control throughout, the better.

[PhilFreecash]

If you can convince family or friends to invest then that seems like the best way at least at the very beginning.

[lupe123]

I have found that most people however how sweet they are to you may not be willing to invest in you unless they can see some success. So my method is to try earning a little then go to my friends with hard numbers. As you grow then start including others and even a bank.

but a track record is mandatory in my case.

[SimonTurner]

Another important point that people often overlook is licensing your idea to someone else - if appropriate. This saves you having to raise significant startup capital yourself and is virtually risk free. Its easier said then done though as often getting large corporates to even make time to hear about your idea isnt easy. People are doing it though....

[StealYourDreams]

There is no one best way. Startups vary in the complexity of the business, the amount of capital required, the time spent in the development stage, pre-revenue and the scalability.

Unless you're a proven winner and have had measurable success in the past than the seed capital is coming from FFF (family friends fools).
Most investors want to see that you have a vested interest in any project seeking funding.

Once you've gained some traction either via booking revenue, having working prototypes, reaching certain milestones, etc. then you have a few different options. With regard to equity investments you are looking at venture capital, angels, reverse mergers with a contemporaneous PIPE, self filings with the SEC, underwritten offerings, or a private placement.

Which one you go with is dependent on several factors, but primarily boils down to taking what you can get and how many rounds of financing you will need. If you meet the requirements of a VC or angel and are in the right sector, with the upside they're looking for then consider yourself one of the fortunate ones. Be aware however, that VC is a very expensive proposition and you will be giving up a large percentage of your company. In most instances, you will be giving up control with your first round. If not, you will in follow up rounds. If you have a true winner on your hands it might be worth it. The advantage is that once you've been through a liquidity event you can become a serial entrepreneur and access to VC money for your next project is almost assured.

Angels (organized ones) essentially have the same criteria as a VC although they invest at a slightly earlier stage.

Reverse mergers in the last couple of years have become a viable means to raise capital. Especially if you have a good IR firm that can get you volume. Once you have volume, you have access to the hedge fund money. Some people will disagree, but when it comes to PIPES the hedge funds really dont care about fundamentals, just liquidity. Of course doing a PIPE isn’t without its downside either. I've had investors tell me that discounting the stock is telling them I don’t believe its worth what it's trading for; I disagree. The tradeoff for the money up front and the investor taking the short term liquidity risk is a discount. Structured properly (i.e. fixed conversion price) you receive the money you need for product development, sales, etc. and still maintain control.

Another viable option is doing a "traditional" private placement. That is, meeting one of the SECs registration exemptions and selling stock to accredited investors. If the stock is trading, you simply discount the stock to make up for the holding period. The SEC changed the rules regarding 144 stock shortening the holding period for non affiliated parties for six months.

If the company is private you can still sell the stock to accredited investors. However, it's a tough sell being that unless there is a liquidity even they end up holding worthless stock. Much like the VC and Angel investors they look for 10x + their initial investment. Their sweet spot seems to be 18-24 months. The upside to private placements is that you dictate the terms, how much the stock sells for, what percentage of the company you give up, etc.

Yes, it is a very, very difficult sell. However, investors that buy in the private placement arena are wealthy individuals who want to be part of the next big thing. They don’t care about percentages, control, etc. they just care about how much money they can make. In other words, they're gamblers.

You have to target your offering to the right group and each have daren’t reasons and amounts they invest. I hope there's some decent information somewhere that will, at minimum, get people thinking. Most people not familiar with the various methods of raising capital seem to apply VC standards to all investments. If you are targeting a VC great, if not you need to structure your offering to meet the criteria of your investor.

[SSpiro]

Good thread.

[ChrisBenjamin]

Steal Your Dreams pretty much summed it up!
I have clients doing all the above basically... really depends on your stage, your needs, your product/service, and your goals.

[Jay Brass]

In my opinion, the best way to get your own cash for your own business is to make it yourself. It's always good to have definite cash flow coming in before you start something as risky as a new business.

[babajeje]

very interesting thread.for a start up ,the required capital comes in through savings ,friends , families .the business track record is very important before any outside investor comes in .they also must have seen th epotential in the business before putting in any cash.

[lpo_xy]

In my opinion, i believe that for starters, you would have to raise your own capital before you can even ask some from friends and families. Its not easy but hey, one has to start from somewhere.