Tech entrepreneurs hunting for funding need to consider a range of options. Whether it’s bootstrapping the business or seeking out bank, angel or venture capital investment, the path to take depends on the company sector, what’s happening in the market andyou’re your willingness to let go of some control. Here’s a quick primer on what to consider as you build the next big thing.
Bootstrapping — or funding the business yourself — is a common practice for tech startups. Whether it’s using your personal assets or getting cash from family and friends, many a tech business has started from relatively humble beginnings.
Sid Mookerji, founder and Gglobal CEO of Software Paradigms International, says that he initially kept his day job while he built the now 19-year-old retail IT services and solutions provider. Along the way, he invested his own money, tapping into his savings. For him, it was about control. “My perception and evaluation of SPI was always higher than the investors, and so I decided that we could make something out of it, though it might take a few more years than with external investors,” he explains.
Hayden Williams, co-founder of Treatings, a professional networking platform, also used personal savings to fund his business. He believes that if the product or service you’re developing is going to take some time to get to market, bootstrapping might be a better idea than looking for outside investment at the start. Treatings went through a tweaking process before the final iteration of his site went live six months ago. “If we had raised money, we probably wouldn’t still be around,” he says. The reason: Investors generally require the company founders to agree upon expected milestones, and Williams’s company simply needed more time to develop.
Banks aren’t generally geared to dealing with, understanding and vetting the viability of tech startups, so commercial lenders aren’t usually thrilled about lending to them. Because the failure rate of startups is high, lenders are skittish about doling out cash to any untried idea or service.
Still, a small number of banks are using industry expertise to lend to tech startups either directly or through the efforts of local tech incubators. According to Carrie Walsh, Managing Director of the Entrepreneur Services Group at Silicon Valley Bank, the bank leverages the bank’s relationship and network in the industry by looking specifically for emerging technologies. “We vet companies and make sure they’re fundable and defendable,” she says.
For startups that have a limited window to get their product to market, a quick injection of capital through an angel investor is sometimes what’s needed. Angel investors can also fund capital intensive products that require external financing in the seed stage.
One advantage of angels is that, unlike a bank loan, they won’t load you with debt and impact your cash flow. According to Walsh, the impact of angels today is greater than it has ever been. She advises companies to seek out angel and institutional investors before they need to raise a formal amount. “Startup activity is high,” she says. “So lay the foundation early and get relationships before they’re needed.”
As you go looking for money, remember that we’re no longer in an environment where seed funding will be handed to concepts. “Sophisticated investors want recommendations to companies, and they’re looking for fully formed business plans and people they know who can make money with the idea,” says Marianne Hudson, Executive Director of the Angel Resource Institute. She suggests do your homework and networking at meetups and association meetings, as well as with university and industry leaders and other entrepreneurs, to find established investors with a keen perspective on their preferred type of business.
Startups can also tap into accredited investors via sites like AngelList, Gust or MicroVentures. But it’s local connections that are particularly key, given that the bulk of angel funding stays near the angel investor. Silicon Valley Bank’s Halo Report indicates that 72 percent of angel investment deals in the second quarter 2013 occurred in the company’s and angel group’s home state.
Tapping into venture capital requires a similar approach to tracking down angel investors. Industry networking and help from local venture capital associations and tech meetups are good ways to reach out to the VC community. But as of late, says Walsh, venture investors have been less interested in funding seed stage tech companies. “A lot of early stage and venture funds [have gotten burned], and so tech companies have to come to table with a clear concept to market that has long-term value.”
Venture capital is also favoring certain sectors of the tech industry. Currently, it’s software. There’s decidedly less interest in Internet-specific companies than there has been in the past.
— Myra Thomas