8 Sources of Startup Funding

Fetching funds and other resources is a critical aspect for any startup. And, managing investors is an important skill founders need to learn. It is said that getting venture funding is a lot like shifting gears. A typical startup goes through several rounds of funding, at each round getting just enough to shift it into the next level. Read more—Infographic: How Startup Funding Works.

Here are eight sources of startup funding, each revving up the ante of possibilities:

Friends and family (and fools). Borrowing from parents is one way to start your engine. Gather sums from partners and friends, and you might get on track. And, as we say, there is the occasional fool who will write you a check—no questions asked. While it might be easy to fetch funds this way, beware of mixing business and personal relationships. Plus, this won’t provide connections that can propel you later down the road. And, know that when you take money from the general public you’re more restricted in what you can do.

NOTE: The SEC defines an “accredited investor” as someone with over a million dollars in liquid assets or an income of over $200,000 a year. Regulatory burden is lower if startup shareholders are all accredited investors. A startup will be less complicated legally if all investors are accredited.

Crowdfunding. Consider raising money from a lot of people via crowdfunding sites if you can interest them in your project or business. Often, the monies are contributed in exchange for product or perks. Campaigns can be time consuming, and there is no guarantee of success. Be sure to protect intellectual properties before publicizing unique and potentially patentable ideas.

Credit Card. You can borrow money via your credit card. It can be the easiest way to get money to flesh out your idea. If you have good credit—and if it gives you a line of credit—you have an instant loan up to your credit limit. Beware, your credit card bill can build faster than your revenue; and you’ll be responsible for paying whether or not your startup is successful.

Loans. Whether a micro loan, a business loan or an SBA-guaranteed loan, there are a variety of options through banks and lending institutions. Microloans are small loans available through community sources, online lenders or peer lending groups. Business loans require a business plan, personal financial statements and a resume. Still, banks are often cautious about lending to startups. If you’re denied a business loan, ask the bank to consider your loan through the SBA guaranteed loan program. If agreeable, they can forward your application information to a nearby SBA district office for consideration.

Seed Funding Firms. Seed funding firms (often called incubators) are companies rather than individual people. Reaching them is as easy as going to their web site and sending them an email. The investment process with Seed Funding Firms is usually standardized with set terms used for every funded startup. They invest exclusively in the earliest phases of a startup—even with just the idea. In the nascent months, a startup may completely redefine the idea, thus, seed investors usually care most about the people. People are the focus for all venture funding, but especially so in the seed stage. One advantage of seed firms is the advice they offer. Because seed firms operate in the earliest phase, they can advise how to approach Angels or Venture Capitalists, perhaps even make an introduction.

Angel Investors. Angel applies to individual wealthy investors. The best way to find angel investors is through networking. Personal introductions are pinnacle. Cold-calling angel groups near you is an option, but angels (and VC’s) pay more attention to deals recommended by someone they respect. Angels typically invest relatively small amounts of money at early stages. Working with Angels who’ve made money with startups are preferable because they have an understanding of your situation. They’re a source for contacts, resources, and advice, so know that the consideration goes both ways. Here are some Angels to consider for your Arizona startup: Desert Angels in Tucson, Arizona Technology Investors, and Tallwave Capital in Scottsdale.

Venture Capital Funds. Venture Capital (VC) firms are companies. They invest other people’s money. VC funds are harder to get, and come with tougher terms. VC investments average several million dollars and tend to come later in the life of a startup (Related article: Convertible Notes). Often, founders prefer getting funds from more successful VC firms because it adds credibility and legitimacy. When a startup takes serious funding via VC firms, the founders no longer have complete control. However, this power shift can add to the velocity of your startup success. Read more—Why VC Confidence Matters to Every Young Company. When considering VC’s for your Arizona startup, check out Grayhawk Capital and Wasabi Ventures.

Investment Bankers. An investment banker is an individual who works for a financial institution that primarily raises capital. Investment bankers have a network of investors (often both institutional and private angel investors). They work to bring quality deals to this network of investors for funding. Unlike with VC or Angel Investors, funds aren’t readily available to an investment banker. Read more—Three Secrets Investment Bankers Wish Every Startup Knew. Visit US Trust, Silicon Valley Bank, Square 1 Bank when investigating investment bankers for your Arizona startup.

At whatever stage, there is a well of resources to fuel your startup (Related articles: Early Stage Startup Fundraising and Fundraising Tips For Startups). To put your idea in motion, create a solid business plan and hone your pitch. A clear vision and preparation will help your odds of getting funds that will shift your idea into the next gear. Investors expect that you will either sell your startup company or go public, so you will need an exit strategy—meaning companies that could get bought or go public. This is where investors get their capital back. Thus, an “exit” is an integral part of a startup vision. Map out your road to success and enjoy the journey.