Dilution and control are two very real issues to consider when it comes to funding your startup. Conner Forrrest takes a look at a few traditional alternatives to Angel investors and Venture Capital that should always be considered before you jump to the need for outside capital.
How to fund your startup without venture capital
In virtually every instance, there is one ingredient that can make or break a startup in the early days — money.
Many founders follow the same path. Once they have an idea, they begin pitching traditional VC firms or start looking for an angel investor. These options are great resources for some, but raising money this way can be problematic.
For starters, you usually have to give up equity shares to raise the money.
“My experience is that when you have outside funding, they’re going to act like they own your business because they do,” said Stacy Griggs, president and CEO of El Toro.
If you want to be able to make moves quickly, without much input, it makes sense to avoid traditional equity-based funding models. Also, as you continue raising money, it can contribute to dilution, which means you’ll own less and less of your company over time.
Entrepreneurs who need cash, but want to avoid VC or Angel investments, actually have quite a few options for raising capital on their own terms.
Let’s decode a few of the most popular alternative methods of fundraising.
Friends and family
It’s often said that you should never go into business with family, but that doesn’t mean you can’t borrow money from them, right?
Many times it may be easier to convince your friends and family to invest in your startup than to convince an institutional investor. This carries its own connotation for your business, as the average layperson typically doesn’t have the same eye for a disruptive company that a seasoned investor does. However, the support of friends and family can be a valuable asset when you are trying to get your startup off the ground.
“No one will love your ideas as much as your family,” said Travis Fox, co-founder of 3Form Media. “They can share your belief in your vision or plan, and that kind of support has a value all its own.”
Still, if you need money for your business it can be a smart place to look. The first reason being that there’s much less song and dance involved in getting the investment and the funds are usually available quickly.
“We didn’t have to spend a month writing a business plan, we could spend that month on figure out how to better perfect our technology,” Griggs said.
Money and relationships can be a caustic mix, though. When someone invests a large sum of money in a project, they are often met with the desire to control part of it. According to Fox, this could lead to unwanted advice, a demand for progress updates, and miscommunication — something that can especially dangerous when it’s with people you know well.
Private equity and venture capitalists go into deals with the knowledge that they won’t get everything back. It’s not always like that with friends and family.
“Of course, the most dangerous possibility of this situation is if the venture fails,” Fox said. “Very close, valuable personal relationships could be destroyed.”
The Small Business Administration (SBA) is a government entity that provides assistance to small businesses in the US in a variety of ways, including various loans and grants. At the end of its fiscal year in 2014, the SBA approved nearly 53,000 loans totaling almost $20 billion.
The SBA works through regional offices. Their loan and grant programs are great ways to raise funds without diluting shares and they also offer …