The Best Ways to Raise Money for Your Startup
Startup tech firms are highly dependent on outside financing. According to the Small Business Administration Office of Advocacy, high-tech businesses rely more than other operations on outside loans and investments, and they raise larger amounts of capital at their founding than other businesses. A big reason for this is the exceptional interest of investors in technology-driven companies. Despite that, there’s a typical path to raising money, and accredited investors and VCs usually come a bit further down the line.
Where to Begin
The first step is bootstrapping by using personal funds, whether they come from savings, bank loans or a home equity line. It’s not uncommon to look to family and friends for capital via loans or equity investment, but such deals need to be negotiated carefully. Family members might not be wise to the ways of the startup world, and aren’t necessarily accustomed to the high failure rate of new businesses. But whether you’re taking money from family, friends or professional investors, you have to be ready to give up some equity to in your venture.
If you think your business may go through a number of iterations before it reaches critical mass, bootstrapping is probably the best way to go before looking for professional investors. They simply won’t be interested in putting money into a business that hasn’t settled on a clear vision.
Finding Angel Investors
Once your business gets to a certain size, it’s time to look to angel investors who can offer larger amounts of seed money. Remember that angels can offer more than money: They bring business expertise and other investment connections to the table. In a nutshell, angel investors are typically folks with money, generally serial entrepreneurs and professional investors, who are looking to buy into a company they can get behind.
To find angels, start with the Angel Capital Association. However, you’ll also need to network at tech meetups and local tech associations, as well as with university and industry leaders and other tech entrepreneurs to locate seasoned angels with tech expertise. Online sites, like Gust or MicroVentures, are another way to find angel investors.
The next step, to get even larger amounts of funding, is to find venture capital investment. VCs will often install members on your board and become involved in the management of your company. Venture capital investment can take the form of a first round, or Series A, as well as second or later stage rounds.
Like angels, VCs come with business expertise and connections. Their investment also provides a big seal of approval, increasing your profile in the investor community and beyond. Plus, VC firms will be your partner in eventually selling your company or going public if either of those is your goal.
The best way to find VCs is to tap into your industry networks, venture capital associations and tech meetups. But often venture capital will seek you out if you’ve developed a high enough profile. Just remember, the VC community is less interested in seed stage than it used to be. It’s best to make sure your firm has developed its concept or product to the point where there’s an obvious path to market.
Finally, there’s the relatively new strategy of crowdfunding. When taking this approach, think carefully about what your business needs not just financially, but in terms of expertise, and then consider whether this type of fundraising will provide it. On top of that, consider how crowdfunding could affect subsequent investment rounds. Some observers say many angel groups will walk away from a business whose first round was obtained this way.
Others disagree. They contend that dynamic may apply more to those that have included equity in their crowdfunding approach. Others who successfully raised money through pledge- or donation-based crowdfunding have actually had angel investors cold-calling them wanting to set up a meeting, some say.
“If you can, don’t give away equity, just sell some product or sell some service you’re going to provide,” advises Richard Swart, a specialist in crowdfunding at the University of California-Berkeley. “Demonstrating capacity and demonstrating market acceptance though a successful crowdfunding campaign is a great way to attract professional investor interest.”