There are three key types of investors that startups can turn to for money in the early stages of creating a new company.
The Venture Capital System
When talking about startups and money, we think immediately about venture capital. There’s a sort of system that goes along with dealing with these investors: you approach them in turn, as you need more money to ramp up your business. It is possible to bootstrap a startup, of course, but these three types of investment represent the alternative.
- Friends and family: When you first start out, you need just enough cash to get up and running. If you don’t have any savings to see you through, you turn to the people who love you enough to write a check.
- Angel investments: Once you’ve gotten far enough in the process to have something to show — even just a demo — you can go to angel investors for funding. Angel investors, as a rule, are people who happen to have money and want to invest it in cool projects, so you’ve got to be doing something interesting if you want to get an angel investor involved.
- Venture capital: You can get venture capital firms involved when you’re far enough along to show that you’ve got something likely to make some high returns relatively quickly. Venture capital firms aren’t risk-averse, but they do need to have a sense that you’re likely to make it.
But this system is a tough one. Assuming that your startup actually keeps growing, it’s tough to get money out of any of these types of investors. It can be the equivalent of winning the jackpot.
The Incubator Route
It seems like there are incubators popping up in every major city lately (and even in some less urban areas — my county has its own incubator). Just how early in your startup’s evolution you can join an incubation program depends on the incubator. But many of these programs give you enough money to get off the ground and start generating some revenues, as well as offering ways to enter the venture capital system a little closer to the head of the line.
What About Crowdfunding?
President Obama recently signed the JOBS Act into law, basically making it legal for startups to use crowdfunding to raise up to $1 million. It’s not a viable option yet — there are hoops that a startup has to jump through, like going through a broker or a crowdfunding portal, but there are people already working to build the necessary infrastructure. But there are several companies that have taken interesting approaches through crowdfunding money through selling products they haven’t quite created yet.
There may be other funding options available in the future: with crowdfunding offering an alternative to the venture capital system, other options may appear.
What funding method appeals the most to you? And why?
Image by Flickr user 401K.