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Startups: Top 10 Funding Sources

Written by: Martin Zwilling

Article Overview: Even in today’s stressed economy, there are multiple ways to keep your startup alive and moving forward. I find that many startup founders fixate on one or two, often at the expense of their business. Following is a prioritized larger list of sources, with some “rules of thumb” which may save you a lot of time and energy:

Startups: Top 10 Funding Sources

Even in today’s stressed economy, there are multiple ways to keep your startup alive and moving forward. I find that many startup founders fixate on one or two, often at the expense of their business. Following is a prioritized larger list of sources, with some “rules of thumb” which may save you a lot of time and energy:

1. Self Funding. “Bootstrapping” from your savings is the preferred source of funding for your startup – if you have the money. The advantage is a vast savings in time and effort searching and preparing for any of the other alternatives, and you don’t have to encumber yourself or give up control and ownership of your company. But don’t quit your day job before your new company is up and running.

2. Friends and Family. After self-funding, this source is the most common one for early stage startups. Use this source before have a real valuation, a real product, or any real customers. As a rule of thumb, it is a required step, as outside investors will not normally consider providing any funding until after they see “skin in the game” from one of these first two sources.

3. Small Business Grants. This source often gets overlooked, but it can be a lifesaver if you meet the qualifications. Although applying for grants is time consuming and certainly not the fastest way to raise money, the government and other funding agencies do not want ownership in your company, and you probably won’t pay any interest. Related sources include local business development agencies and SCORE groups. You have to be relentless in this pursuit to win.

4. Loans or Line of Credit. If your company needs only a temporary or small infusion of cash, you should try for an SBA loan, or if you have a good relationship with your bank, a line of credit. Many people are afraid to tap into debt sources because they don't want to be burdened with the debt if the startup fails. However, if you don't believe in the company enough to place your own credit behind it, why should anyone else?

5. Startup Incubators. A startup incubator is a company, university, or other organization which provides resources for equity to nurture young companies, helping them to survive and grow during the startup period when they are most vulnerable. These resources would likely include office space, consulting, and even a cash investment.

6. Angel Investors. If you are looking for less than $1 million and more than $250 thousand, the next step is to tap into a local angel network. If you don't know any “high net worth” individuals, use your advisors to find them. If you can't raise $1 million in angel investment, your idea may not as good as you think... or you may not be the right person to sell it.

7. Venture Capital. Many people think that venture funding is the only source of start-up capital. Not only is this not true, but often an investment from a venture capital firm means a huge loss of equity. As a rule of thumb, don’t try this one in the earlier stages, and don’t try it unless you need more than $1 million. If you go for venture capital, don’t expect a quick fix, so prepare to spend at least six months searching for and closing the deal.

8. Bartering Services for Equity. Bartering occurs when you exchange goods or services without exchanging money. An example would be getting free office space by agreeing to be the property manager for the owner. Exchanging equity for services also works with legal counsel, accountants, engineers, and even sales people.

9. Partner with Beneficiary Company. A more established company may see the value of your product as complementary to theirs, and be willing to advance funding, which can be repaid with later revenue.

10. Partner with a Major Customer. Similar to the previous case, you may find a customer who would benefit greatly from your product, and be willing to advance you the cost of development. The advantage to the customer is that he will have enough control to make sure it meets his requirements, and will have first dibs on the delivery.

Just remember that you don’t get ‘something for nothing’ in any of these cases. All funding decisions represent complex tradeoffs between near-term and long-term costs, ownership, control, and time and effort. Your funding strategy is a key part of every business plan, so don’t hesitate to consult the right startup professionals to give you a hand.

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Article Tags: 2 friends, applying for grants, bootstrapping, business development, day job, economy, founders, friends and family, good relationship, infusion, lifesaver, loans, preferred source, rule of thumb, rules of thumb, sba loan, score, small business grants, startups, win 4



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