Great companies start with great business ideas. But turning those ideas into reality requires capital — sometimes, a sizable amount of capital.
Many entrepreneurs dream of landing a huge round of venture funding to meet their needs. But in the beginning, that’s unlikely to happen for early-stage companies. In fact, according to the National Venture Capital Association, only about 1,000 out of the 627,000 new businesses initiated each year in the U.S. receive venture funding.
Fortunately, there are more financing sources than ever for early-stage businesses. But identifying the ideal sources of capital can be tricky.
Here are some options:
Bootstrapping
Traditionally, some early-stage companies fund their businesses through bootstrapping. Young companies bootstrap their funding needs by relying on early customer revenue, penny-pinching, and even using personal credit cards to make ends meet.
Friends and Family
Friends and family contribute approximately $60 billion to early-stage companies each year, according to the Angel Capital Education foundation.
Raising money from friends and family for an early-stage company can be a lot less complicated than trying to convince professional investors to believe in the company.
Angels
An angel investor is typically an affluent individual who provides capital in exchange for ownership equity. Some angels are individual investors, but many band together and invest as a group.
Angels are more active than ever. The median size of angel financing was $680,000 in the first quarter of 2013, according to the Halo Report.
Crowdfunding
Crowdfunding is one of the most exciting innovations in years. Individuals from all walks of life contribute pocket change, typically $10 to $20, to the companies and ideas they like best. If enough people like the company’s idea, those amounts can translate into a considerable sum of money.
Crowdfunded projects raised an impressive $2.7 billion in 2012, across more than 1 million individual campaigns globally. In 2013, the crowdfunding industry was projected to grow to $5.1 billion, according to the Crowdfunding Industry Report by research firm Massolution.
Government Grants
Companies may be surprised to learn that the government may be eager to support your startup. Federal and state governments spend billions of dollars every year funding early-stage projects.
The newest federal initiative, Startup America, is designed to accelerate high-growth entrepreneurship throughout the nation by expanding access to capital.Â
Accelerators
Startup accelerators continue to grow in popularity. There are now about 200 around the world and the number of applicants they attract has exploded over the past few years. A startup accelerator functions somewhat like an assembly line. But instead of spitting out widgets, it churns out innovative companies.
Accelerators typically run 12-16 week programs to propel startups quickly from concept to product. They offer seed money — as much as $150,000 per company — and mentoring in exchange for equity, normally around 7 percent. Programs culminate in a demo day, during which graduates pitch their startups to investors.
Key Takeaways:
Unless you are a serial entrepreneur who has had successful exits and provided large returns to your past investors, consider bootstrapping your new venture until you have at least developed a beta version of your product or service.
When you fund your business from angel investors or venture capitalists, there is an expectation that you will create a liquidity event for your investors within five-to-seven years, if not sooner.
Outside investment to grow your company and reach your intended market quickly could be exactly what your company needs. A good strategic investor will have the ability to help you grow your business through their contacts and experience. Lastly, always be ready to respond to requests from potential investors with a sound business plan.
Stephen Jackson, CPA, is a CohnReznick partner and leads the technology and life sciences practice in Glastonbury.
