After polling our Young Entrepreneur readers, here is our list of the top 8 ways that young entrepreneurs can raise capital for their businesses. I've also included a few of the comments that were left for some of the top points.
#1) Your Own Savings / Self Financing
I would say the best way to go about getting capital is to first start on your own. Whether you're working or can get money from friends and family, you should try to get as much “in-house” as you possibly can. 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.
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.
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.
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. It's not easy but hey, one has to start from somewhere.
No one bets on newbie. You need to prove yourself first before someone bet on you. So best way is use your savings and if you are really confident take the loan.
In my personal opinion, the best way to raise money is: From the start, don't take money from your friends. Eventually, one week sooner, one week later, your friendship will be threatened by the burrowing money issue. That’s why internet is so useful in starting marketing plans as a source of collecting money. A strange is far more helpful, than a friend, when it comes to talk about money. There’s a Portuguese saying that says: "If you want to loose a friend… ask him for money”.
My preferred method is to start a self-financing business. If you can find a business with no major need for inventory or equipment, and withdraw no more than 10 to 25 per cent of the early profits, you’ll have 75 to 90% of cash flow available to pay current expenses and to finance growth. If you already have a job of business that meets your family’s needs, than let the business finance its own growth. I started on a shoestring nearly 24 years ago, working strictly after hours for the first 3 years. By then, I had established myself with a small base of clients, so that in shifting to full-time self-employed I had additional time to find new customers through networking and referrals from satisfied clients. Even while I was only working part-time, the business generated enough cash flow to pay the monthly expenses for my business vehicle, advertising, dues for membership in the local Chamber of Commerce, and a little extra here and there. Once I expanded to full-time, I had the experience and demonstrated cash flow, that borrowing from banks and getting credit cards issued to the business was no problem. One big stumbling block for some people is having the discipline to not start living off the profits until the business is self-sustaining. Many entrepreneurs have the mindset that they have to show off their success by spending money. Any little hiccup in the cash flow, a few slow months, or unexpected expense, and all the business can fail due to being under-capitalized. Quite similar to individuals who win a jackpot and start spending money and acquiring debt beyond what the prize can cover. Self-financing the business from the profits was a sure thing for me, and meant I wasn’t paying high interest rates to borrow, so the profits actually went further. And future lenders will appreciate the demonstrated financial discipline.
#2) Friends & Family
If you can convince family or friends to invest then that seems like the best way at least at the very beginning.
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.
#3) Angels & Venture Capitalists
If you're serious and looking to scale go the VC/Angel route.
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.
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. It's easier said then done though as often getting large corporates to even make time to hear about your idea isn't easy. People are doing it though….
#5) Reverse Mergers
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 don't 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.
#6) Private Placement
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 event 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.
#7) Credit Cards
I hope you enjoyed our list and can refer to it as you try to raise capital and grow your business.
Stay tuned to the blog for our upcoming polls!