CIO journalist Jennifer Lonoff Schiff has some simple ideas for startups to raise capital. The first step before you can raise any capital from anyone besides yourself is to have a stellar business plan. This will let investors know you have done your homework, and have a clear vision for where your business is headed.
It is easier than ever, or so it seems, to open a new business, especially an ecommerce or tech business. But getting money to fund your startup, especially with so many new businesses competing for the same pool of seed money, can be tough. So which methods, or sources, are the most likely to get or give you the money you need to grow your business? Following are nine of the best, according to entrepreneurs and investors.
1. Start saving/Bootstrap.
“My top tip for raising money is: use your own money first,” says Brandon Ackroyd, director, TigerMobiles, who has invested in a number of companies as an angel investor. “Far too many startups expect others to invest when they’ve injected zero of their own money into a business.”
That doesn’t necessarily mean selling your home or hocking your car, but if you are serious about your business and plan on approaching investors at some point, you need to invest your own money first. So it’s important to start saving early.
“I want to see founders who have the confidence to put their money where their mouth is,” he says. “Sweat equity is all well and good, but if you don’t know how to bootstrap and keep costs to a minimum, you’re going to turn off a lot of serious investors.”
2. Join an accelerator, incubator or mentoring program.
“First time tech or ecommerce founders can realize enormous benefits by joining an accelerator, incubator or business mentoring program,” says Ron Flavin, a funding specialist. Tech-focused startup accelerators (e.g., Cleantech Open) can be found in nearly every state, and a growing number of cities are also home to startup incubators. There are even online accelerators.”
An additional advantage of joining an accelerator, incubator or mentoring program is that “these programs provide tech and ecommerce founders with access to valuable tools, resources, connections and expertise that can help them place their startups in a strong position to get funded,” he continues. And “there are also several excellent no-cost mentoring programs (e.g., BusinessAdvising.org) that provide expert guidance that help founders build a strong, fundable business model.”
3. Use crowdfunding.
“The best way for a new tech company to raise funds for their startup is crowdfunding,” says Tamar Huggins, a serial entrepreneur. “Crowdfunding allows the startup to have more financial freedom (when compared to VC and other investor funds). It immediately validates or invalidates the need the company is trying to solve. And crowdfunding can be an impactful marketing tool when used correctly.”
Top crowdfunding sites include Kickstarter, Indiegogo and GoFundMe. There is also StartEngine.
“StartEngine is an equity crowdfunding platform that allows companies to raise capital from the crowd by exchanging equity in return,” explains Howard Marks, founder, StartEngline. “With the recent passing of the JOBS Act, the opportunity to invest, which was originally reserved for accredited investors, is now open to [everyone]. Moreover, companies can raise up to $50 million within a 12-month period.”
4. Take pre-orders.
“Pre-orders can bring cash in before you make or distribute a product, and help you plan production,” says Andrew Haller, founder & co-CEO, AirDev. “Tesla built a wait list of nearly 200,000 customers just a day after announcing the Model 3, [with] each [paying] a deposit of $1,000 toward their purchase.”
5. Enter a pitch contest.
“Entering a [pitch] competition [is] a great way to connect to the right people and secure funding for [your] startup,” says Sagi Gidali, cofounder & CPO, SaferVPN. “While we were in university, my cofounder and I entered the Microsoft Imagine Cup competition. At the time we were seeking seed funding. We won second place and afterwards received many inquiries from potential VCs and investors. In the end, we built a long-term relationship with one of them, and this relationship led us to establish the company we have today, which is very successful, profitable and sustainable.”
“In the first six months of building my startup, Humblee, we participated and won the Make It in Brooklyn pitch competition,” says Zuley Clarke, cofounder, Humblee. “In addition to the prize money, we received valuable feedback from influential judges, made connections with investors and generated a buzz surrounding our business. Winning the pitch competition was incredible, but the benefits of simply entering [a pitch competition] are great too.”
6. Ask your employer for help.
If you currently have a job, and have a good relationship with the company and/or senior management, “approach your current boss for an in-kind contribution to your new business venture in exchange for equity or future re-payment,” suggests Roy Tal, cofounder, Homenova.
“Office space, internet, utilities, chairs, computers, phones, IT support can all add up to tens of thousands of dollars a year, which can be a fair amount for a business that is just getting on its feet,” he notes. “Your current employer is already paying for the above. And if [the company] is already aware that you are pursuing a new business venture and likes the idea, [it] may be open to allowing you to use [your] current office facilities or even better, contribute some funds.”
7. Take out a small business loan.
“Most people assume they’re going to get angel or venture capital investment when starting an Internet-based business,” says David Nilssen, cofounder & CEO, Guidant Financial. “But the reality is very few ever get funded [that way].” So he advises would-be entrepreneurs to take out a loan.
“Unsecured loans can provide up to $150,000 in small business financing without personal collateral required from the business owner,” he explains. “What’s more, the funding process is fast — most deals close within three weeks or less.”
You can also apply for an SBA loan. “SBA loans offer a bevy of benefits for entrepreneurs, including low interest rates, long repayment terms and no ballooning costs, so you can focus on what’s really important: building your business.”
8. Ask friends and family (for a loan or investment).
“Obtain loans from friends and family,” suggests Darren Hill, cofounder & CEO, WebLinc. An advantage “of borrowing from friends or family is the repayment plan can be tailor-made, unlike bank loans. [Just] never forget this is a business [arrangement], which can alter the relationship you have with your financier [i.e., friend or family member].” So be sure to have a small business attorney draw up a formal agreement, stating the loan and other terms, for all parties to sign.
9. Use some of your retirement savings.
If you can’t raise cash by another means, consider dipping into your retirement savings. “A retirement rollover, also known as ROBS (rollover as business startup), allows individuals to roll money from their IRA or 401(k) into a new business venture, penalty free,” says Nilssen.
Jennifer Lonoff Schiff is a business and technology writer and a contributor to CIO.com. She also runs Schiff & Schiff Communications, a marketing firm focused on helping organizations better interact with their customers, employees and partners.