You can often find Ron Cook – the Program Director of Full Sail’s new Innovation & Entrepreneurship Master of Science degree program – dishing out financial advice for students via his blog or during his series of Personal Finance GPS workshops. In his latest entry, the investor and debt-reduction strategist has mapped out a few ways you can raise money for a new business. Check out Ron’s advice below.
How are startups funded these days?
The most succinct answer to that question is to say that entrepreneurs these days need to be prepared to launch their companies and at least demonstrate an effective business model and the ability to attract customers and make money – without the support of lenders and investors. In today’s economy, entrepreneurs may typically progress through the following hierarchy of funding sources
- Personal Funds (Bootstrapping). Bootstrapping simply means stretching what little capital an entrepreneur may be able to assemble from personal funds before approaching others. For me, that also includes any income that the startup may already be producing, by plowing those profits back into the operation.
- Family and Friends. This isn’t a suggestion – it’s an essential step in the process. Think of it this way, if the people who know you the best, love you the most, trust you and clearly understanding your capabilities – if those people won’t invest in you, why in the world would you expect a perfect stranger to do so? It just doesn’t make sense. Having said that, that’s not to suggest that we are talking about huge sums of money. This “seed money” will simply help us get things going, so that we can move on to the next step.
- Crowdfunding and Peer-to-Peer Lending. Over the past few years, many students have come to me thinking that crowdfunding may be a panacea, with donors scouring websites like indiegogo, Kickstarter and RocketHub for projects worthy of donations. But statistics have shown that less than half of all crowdfunding projects are ever funded. And of those who are not successful, almost two thirds don’t even achieve 20% of their goal. For a successful crowdfunding campaign, the “why” is always more powerful than the “how.” Keep in mind that, at least for now, crowdfunding depends on donations, and those donors want to give money to something they believe in. What you give them in return as a thank you for their contribution will also determine if they will tell others about your project. For information on peer-to-peer lending, check out sites like PROSPER and PAVE.
- Angel Investors. Don’t expect an angel investor to drop in and share their halo with you, but doing some detailed research and exploiting all of your network connections could well get you in front of local investors who will at least hear your pitch. But don’t even bother going if your business model is untested or if your presentation is not top notch. You’ll be wasting their time and yours.
- Other Equity Financing. The JOBS Act will eventually pave the way for equity crowdfunding, but that is still in the future. Do some research, though, and get familiar with the provisions of this important legislation.
- Traditional Lenders. You can’t depend on banks to loan money to unproven startups, so don’t bother even asking. But, banks do loan money for traditional things – vehicles, buildings, equipment purchases, or leasing. With sufficient down payment, reasonable credit, and solid collateral, such as with a vehicle loan, banks may still be able to help, but not for a loan to start the business itself.