The essential information you need to plan your investment raising challenge. Start early, takes lots of time — 3-12 months depending on the type of funding seeking. It will be a challenge, but the rewards can be significant.
You have to ask yourself if you are ready to raise funds
- What do you need the money for research, product development, employees, marketing, etc.?
- How much money will you need and how long will it last?
- Are you looking for loans or selling equity to raise funds?
- How long will I have to repay the loans or when will equity investors want to get their return?
- What does my credit situation look like (personal and business)?
Regardless of how you plan to raise capital, make a list of potential investors on day one, and keep adding to that list every day (angel investors, venture capital investors, or potential crowdfunding investors.
Here are some of the ways you can raise funds: We will primarily focus on Crowdfunding, Angel Investors, and Venture Capital Firms. Here are some of the ways you can raise funds:
Bootstrap your development. Are you able to use personal savings and loans?
Family and Friends. Are they able to help in the short-term or long-term?
Vendor Credit from suppliers. If you are working with suppliers, you may be able to get an extended payment option.
Business Credit Cards. A good source when you have to buy things, but it can get expensive if you are getting cash advances.
Invoice Financing. You receive money based on your invoices and business activity and repay the loans when your clients pay you. The rates can be very high.
Equipment Financing. If you are buying equipment, you could get a loan based on the value of the material often fro the equipment company itself.
Business Line of Credit. This gives you a way to pay for items as you need them and pay back the money when you want. This can be less expensive than Business Credit Card programs.
SBA (SmallBusiness Association) loans. They have small microloans available by matching you up with a bank. They also have more jumbo loans you can apply for but the time required to get final approval can be very long.
Incubator and Accelerator Programs usually conduct several programs a year. You apply to be a participant in one of their 12-week programs. They match you up with mentors to help you with the information you will need to develop your product and help you prepare for a presentation to investors. They often give the participants a small amount of money to work with during the program, and they generally get about 6% of the startup’s equity, but there are exceptions.
Crowdfunding. There are two types — one where you raise money by basically “pre-selling your product” to the crowd. These are platforms like Indiegogo and Kickstarter. People who are interested in the product or service can “buy” the products or services and get a promised delivery date. The buyer will also be one of the first people to get the product.
The second type of crowdfunding is when you raise money through debt or equity or a combination of both. Debt funding pays a dividend, or the debt can be convertible into stock based on a defined event. Equity funding is for shares of stock and ownership in the company. You do not have to be an accredited investor to this debt or equity. However, the SEC limits the amount you can buy based on your income.
Angel Investors are accredited investors (have a salary of $200,000 per year or 1 million dollars of assets not counting their home.) They are often corporate executives and often former founders themselves. They are generally interested in the product or industry, and often want to be involved in the company in some way, Investments typically range from $10,000 to $100,000 per investor. (and angel investment clubs which are formal groups with rules and syndicates which are often Special Purpose legal entities to invest in a specific investment )
Angels are all accredited investors (have a salary of $200,000 per year or 1 million dollars of assets not counting their home.) They are often corporate executives and often former founders themselves. They are generally interested in the product and industry, and ofter want to be involved in the company in some way, Investments typically range from $10,000 to $100,000 per investor.
Venture Capital Firms find and invest in high-growth companies through one of their investment funds. The money for the funds, in addition to the Venture Firms’ own funds, also includes funds from other accredited investors, funds, pension plans, and corporations. They are looking for investments that will pay them a return in 4-7 years. The amount they will invest can be very significant, and will generally be investors for additional capital raising rounds. Due diligence is very extensive, and the time required to receive the funds could take months or up to a year. They will also want a significant amount of stock (in various forms) and a seat on the Board of directors.
We will get into more depth on these fundraising methods in future articles.
