What is the right path when evaluating the pros and cons of different sources of startup funding for your venture?
There’s more than one way to fund your startup. Each has its own pros and cons. Which is right for you?
Small business loans from banks used to be the first stop and go-to source for funding new companies.
- You won’t have to give up equity in our company
- You don’t have to create a pitch deck
- May find it easier to finance real estate assets and equipment
- Good credit may help make up for what you lack in design skill and pitching ability
- Rarely available for new startups
- Lots of paperwork and lack of common sense underwriting
- Poor customer service
- Monthly debt service repayments required even if you aren’t making money
Equity and debt crowdfunding and hybrid uses of convertible notes exploded in popularity with the passing of the JOBS Act. However, when you are thinking about the pros and cons of different sources of startup funding and considering this one as an option regulation can be a real hurdle.
- Don’t need to add the pressure of monthly repayments and overhead
- Ability to recruit more stakeholders who are invested in your success
- Leveraging existing platforms and investor databases
- Raising publicly can help create buzz and urgency among potential investors
- Still requires a strong marketing strategy and a sizable marketing budget
- Can require hefty legal fees and filing with the SEC
- Platforms can be costly and take a big bite out of your raise
- Success can rely on already having your round significantly subscribed to in advance
Donation-based crowdfunding predates equity crowdfunding and has been used to launch a variety of successful startups.
- No need to give up equity in your company or take on the burden of debt
- Use it to gain early customer and users
- Generate buzz, branding, and marketing while raising money for your startup
- Lower regulatory and legal costs
- It’s not as cool as it was. It’s a little too 2013
- Platform fees and processing costs can take a big bite out of money raised
- Your success or failure is all public online for the world to see forever
- Can require a lot more marketing, strategy and investment than most founders expect
Friends & Family
No matter how big you go, raising money from friends and family will probably be one of your first steps as you are thinking about the pros and cons of different sources of startup funding. Other investors are going to question why they should trust and believe in you if these people who know you best haven’t.
- They may be far more forgiving if you fail or it takes longer to get results
- You’ll love being able to share the rewards of your success with them
- Low expectations for pitch decks and business plans
- The low burden of meetings and pitching and negotiating terms
- If it goes badly you could lose your most valued relationships and friendships
- May not be experienced investors or advisors
- Your initial circle and network may not have a lot of capital to invest
- You could end up diluting your cap table without getting much capital in
When evaluating the pros and cons of different sources of startup funding, keep in mind that angel investors are usually your next stop on the fundraising circuit after your friends and family round.
- Will invest based on you as the founder and the idea versus financials
- May provide connections to angel investment groups
- More likely to play a passive role than venture capital firms
- Can be a way to attract advisors and future introductions to other investors
- Can require time pitching and nurturing these contacts
- May be dealing with inexperienced investors with little structure
- May not be experienced operators or qualified advisors
- Can require giving up significant equity early on in your venture
Startup accelerators and incubators can be a valuable vehicle for getting focused, speeding up your momentum, gaining early seed money and introductions during demo days. Keep in mind that in terms of the pros and cons of different sources of startup funding accelerators give little capital for a sizable chunk of equity.
- Forced focus on your startup and making progress
- Being surrounded by other founders and experienced entrepreneurs
- The chance to present to a room full of qualified investors
- Branding and credibility if you have joined a well-known accelerator like Y Combinator
- You may not get into your chosen accelerator on your first application
- You will have to travel and stay there for several months
- It’s fast-paced with big expectations for producing tangible results
- Funding amounts are typically very small, and equity taken can be significant in comparison
Venture Capital Firms
VCs are often the main target of entrepreneurs seeking funding. Yet, they often come to the table much later, after tapping these other sources of funding. As you are ranking the options and analyzing the pros and cons of different sources of startup funding I would probably say this is one of the most powerful options.
- Large funding amounts from each of these firms
- Organized due diligence and funding processes
- Capable board members who can open lots of doors
- Can add significant credibility, media attention and appeal to talent
- No one wants to be the first lead investor
- Exhausting months of pitching and investor meetings
- Once you take their money you are working on their goals and timeline
- The pressure to make choices that may not be best for the business or your customers
Many entrepreneurs have started out financing their companies with their own personal credit cards.
- Retain all control and decision-making authority without partners or co-owners
- You can get started right away without a pitch deck or investor meetings
- Save months of time and distraction, and just start doing business
- Great flexibility if you need to pivot your startup or switch plans altogether
- Very limited amount of funds available
- It’s very expensive money to use
- Extreme pressure to pay back the money and stay on top of payments
- Not as flexible as having cash in the bank
Remember that storytelling plays a key role in fundraising. This is being able to capture the essence of the business in 15 to 20 slides. For a winning deck, take a look at the pitch deck template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
ACCESS THE PITCH DECK TEMPLATE
Still not after going through the pros and cons of different sources of startup funding? Check out this fundraising training where we help founders from A to Z with fundraising.