Financing a Startup

A Million Dollars isn't Cool, You Know What's Cool?


At some stage, most entrepreneurs will need to finance their startup. This means raising money to fund the continued growth and development of their business.

Financing a startup can be one of the biggest challenges an entrepreneur will face.


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Roughly 90% of startups fail, and a large part of this is due to the inability to raise enough money.

Investors and financial institutions specialize in funding different stages of the startup lifecycle.

Each stage has two unique factors

  • RISK and
  • OPPORTUNITY

Early stage businesses have higher risk but also higher potential for reward, while later stage businesses have less risk but also less opportunity for reward.

While there are no rules or set formulas for startup financing, it is important to understand the risks and opportunities at each stage.

Where To Raise Money

There are numerous ways to raise funds depending on the stage and funding needs of a company.

Early Stage Companies

  • Friends and Family
  • Crowdfunding campaigns (Kickstarter)
  • Grants from the government or small business loans.
  • Angel Investors

More Mature Companies

  • Venture Capitalists
  • Private Equity
  • IPO (Initial Public Offering – when a company goes public to sell shares of its stock.)

Calculator: Who wants to be a millionaire?


Getting Started

So, you’re building the “next big thing” and ready to raise money.

In the beginning, it’s a catch-22 (a lose-lose situation). You need financing to build the product or service, but very rarely will an investor give you money without a beta (prototype version) already built or customers already using the product.

  • advice
  • mentorship
  • referrals
  • support in making difficult decisions

How to Raise Money

The first step is often bootstrapping- starting a business using personal means and finances to get it off the ground.

Ways to bootstrap can include:

  • Maxing out credit cards
  • Borrowing against property
  • Cashing in savings
  • Pulling money out of retirement accounts

Did you know that there are no taxes or penalties for using a 401(k) or IRA to fund your business?

From there, most startups need to move on to outside investments. Aside from the money, there are other benefits that come from bringing on investors.

Benefits From Bringing On Outside Investors:

  • advice
  • mentorship
  • referrals
  • support in making difficult decisions

If investors have experience in the same industry, they can make it much easier to recruit talent and grow the business with their expertise and network.

Funding Options

funding-startup
With the backing of multiple investors at different stages, a company should aim to have customers and sales in place to generate cash flow. The transition is made into a growth-stage company, which comes with a whole new set of challenges: growing the business, adding staff to support the expansion, and implementing a team to continue upsizing the company.

How to Find Investors

There are multiple ways to secure funding. Networking and utilizing personal connections are often the most effective approaches.

Fun Facts:

Raising money does not necessarily guarantee success. Here are a few examples of companies that raised millions of dollars and crashed soon after:

  • Pets.com raised $82.5 million in an initial public offering (IPO), but closed after operating for a little more than two years.
  • Webvan raised $375 million in an IPO but closed after two years.
  • eToys raised $164 million in an IPO but also closed after two years.
  • Kozmo.com raised about $250 million but closed after three years.

Here are some examples of companies that did not raise money and have grown to become incredibly profitable and lucrative businesses:

  • MailChimp, the email marketing and subscription company, recorded over $400 million in revenue last year and has never raised any outside funding.
  • Nasty Gal initially started on eBay, and Sophia Amoruso, the founder and owner, bootstrapped this startup for five years before raising outside capital. Nasty Gal then raised over $50 million. Eventually, Nasty Gal filed for bankruptcy in 2017.
  • FedEx initially didn’t take off. When it was on the verge of bankruptcy, Frederick W. Smith, the founder of FedEx, took the company’s last $5000 and flew to Las Vegas to play blackjack. He made $24,000 which he used to keep the company afloat

References

“Enabling Entrepreneurs.” Angel Investor Bill Payne Associates RSS. Bill Payne and Associates, 5 Feb. 2011. Web. 27 Jan. 2015

“Estimating Startup Costs.” U.S. Small Business Administration. U.S. Small Business Administration, n.d. Web. 27 Jan. 2015

Newton, David. “Understanding the Financing Stages.” Entrepreneur. Entrepreneur, 15 July 2001. Web. 30 Jan. 2015.

Shontell, Alyson. “Now-Massive Companies That Didn’t Need Venture Capital To Get Off The Ground.” Business Insider.
Business Insider, Inc, 01 Oct. 2012. Web. 1 Mar. 2015

“Valuation Methods: Spotlight on the Venture Capital (VC).Method.

“Worthworm. Worthworm, 15 Jan. 2014. Web. 30 Jan. 2015. “Valuation Methods.” Valuation Methods. Global Valuation Services, 2015. Web. 30 Jan. 2015.

“Choose Your Business Structure.” U.S. Small Business Administration. U.S.

Small Business Administration, n.d. Web. 20 Jan. 2015.

Dalke, Jim. “The Funny Stories Behind Your Favorite Startup Names, and What They Could Have Been Called. “Chicago Inno”.
Chicago lnno, 15 Sept. 2014. Web. 20 Jan. 2015.

Harroch, Richard. “10 Big Legal Mistakes Made By Startups.” Forbes. Forbes Magazine, 3 Oct. 2013. Web. 20 Jan. 2015.

How to Start a Startup. Dir. Same Altman. Perf. Sam Altman. Standford, 2013. Lecture Video.

“Kauffman Index of Entrepreneurial Activity Interactive.” Kauffman Foundation, 9 Apr. 2014. Web. 20 Jan. 2015.

Shawa, Noor “Business Plan, Featured, Food For Thought” 10 Nov. 2012

Vital, Anna “How Funding Works – Splitting The Equity Pie With Investors” 9 May 2013

Patel, Neil “90% Of Startups Fail: Here’s What You Need To Know About The 10%” 16 Jan. 2015 Forbes.com

Sluis, Age “What I have learned about startup funding in 10 quotes” Efactor.com

http://www.cnet.com/news/pets-com-latest-high-profile-dot-com-disaster/

http://www.inc.com/drew-hendricks/5-successful-companies-that-didn-8217-t-make-a-dollar-for-5-years.html

http://www.forbes.com/sites/ericaswallow/2012/12/27/bootstrapping-startup-venture-capital/

http://www.businessinsider.com/bootstrapped-companies-2012-10

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