Editor’s Note: YoungEntrepreneur’s Ask the Expert column seeks to answer questions about everything from starting a business to growth strategies. To follow the column on Twitter — and ask a question — use hashtag #YEask, or leave a comment below. Your query may be the inspiration for a future column.
Q: What’s the best way to raise capital for my online venture? What are my options?
- Greg Swiszcz
A: First of all, have patience. While many websites make fundraising and launching a tech startup look sexy and easy, the truth is it’s more like a rollercoaster full of ups and downs. The process is mentally and physically exhausting and more demanding than a full-time job. But it sounds like you’re up to the challenge.
Here are three quick tips for raising capital:
1. View raising capital as a sales process. In its most basic form, raising capital is persuading someone to give you money in exchange for something. This typically results in: ownership (equity), a portion of future revenues (revenue sharing) or preorder of product (crowdfunding). When talking with any potential investor, you need to be selling them not on the features of the offering, but on the opportunity to turn their investment into something much larger. You are selling the opportunity.
2. Understand the basic funding sources. There are many sources of funding, each with their own purpose and set of rules and expectations. Understanding them drastically increases your chance of raising capital. Here’s a quick snapshot.
Bootstrapping: At the earliest stages, self-funding is ideal because you can retain full control of your company. The funds can come from numerous places including savings, credit cards and the sale of assets. Self-funding is also important as it demonstrates to future investors that you have skin in the game, and that you’re not expecting them to take on all of the risk.
The 3 Fs: Friends, family and fools is a logical next step in the funding continuum. This is a very difficult step for most entrepreneurs as you are asking those that are closest to you to invest money that may be lost. This round has been known to destroy relationships and, as such, should be handled very carefully.
Debt Financing: To oversimplify, debt financing is typically a loan of some sort from an investment firm, a business or a bank. One major advantage of debt financing is that you maintain ownership and control of your business. The downside is that this obligation may make raising equity-based capital more challenging, as most investors don’t want to put money into a company that’s in debt. They’d prefer to invest in firms that put proceeds back into the company.
Incubators or accelerator funding: Accelerators have been popping up all over the country in many forms. A pretty standard approach is to provide a program that offers mentoring, networking, access to pitch investors and $20,000 to $30,000 to help jumpstart the idea. The terms of these programs range drastically but typically involve a grant of some sort, small equity positions or warrants for the time and dollars invested.
Equity Funding: This type of financing, which offers investors ownership stakes in companies in which they’re invested, is what most entrepreneurs are asking about when they’re looking to raise capital. The two primary sources of equity funding that most founders focus on are angel investors and venture capitalists.
Have a question for YE’s experts? Submit your questions in the comments section below and those with the most likes from other readers will be answered. On Twitter, use the hashtag #YEask. Please include your first and last name, your location (city and state) and the name of your business in your comment.