Financing Options For Startups
I got a bunch of great suggestions in my kickoff post on this topic last week. Based on that feedback, the series is going to look like this:
1) Friends and Family
2) Contests/Prizes/Accelerator Programs
3) Government Grants
4) Customer Financing
5) Vendor Financing
6) Convertible Debt
7) Preferred Stock
8) Venture Debt
9) Capital Equipment Loans & Leases
10) Bridge Loans
11) Working Capital Financing
This list is roughly in chronological order of how a small company might avail itself of the various financing options, but there are always exceptions. Starting a company is more art than science.
I want to do each financing option as its own dedicated post so I’m not going to start today. I will start next week with friends and family.
If you are looking for some meaty MBA Monday reading this week, I point you to Brad Feld and Jason Mendelson’s awesome venture capital term sheet series, which is required reading for anyone seeking to raise venture capital.
Would love to see your thoughts on some of these accelerator programs term sheets or acceptance documents. We found seedcamps to be a little too much. You’ll be at TC today right? Be sure to say hi to the guy with the happy cloud!
Fred, with so much emphasis on angel and venture funding, I think most people forget that 99% of companies will receive neither and seem to get by just fine. This may be captured within a different category, but traditional bank financing, SBA Loans, Microloans, etc. are also part of the picture. Also, I’m glad you added customer financing since I’d argue it’s the most valuable.
ummm… I don’t see bartending on your list. 😉
I will figure out how to work that in. And moving in with the parents too
hahah… thanks Fred.****
A good friend funded his start-up playing poker, semi-pro. My bet is that this is a very minor trend by super smart, math obsessed founders.
“Starting a company is more art than science.” That is a statement that should allow all readers to get off on the right foot today.
My art professors mentioned this
One of my favorite quotes (although I have never spent time trying memorize it) is by Andy Warhol. It is his take on business as art. That quote was a MAJOR influence on me. It is one reason I am always learning (actively & passively) about business. Paying attention to various brushstrokes that small business owner/clients made when I was an accountant. Taking notes, and then trying to emulate, the creation of dazzling ‘mental pictures’ an eloquent (and artful) executive would make when speaking to the troops. Etc. I am glad Warhol made this statement; it gave me hope … as my skills in traditional artistic expressions are somewhat lacking. I can barely draw a stick figure 🙂
“Paying attention to various brushstrokes…”Brushstrokes — Nice metaphor in this context.
IF “ART” = “THING BASED ON INTUITION, NATIVE TALENT, AND LUCK, WITH ALMOST NO WAY TO PREDICT SUCCESS” THEN YOU RIGHT.
What about public market options, like reverse mergers bs IPO, etc…?out of scope?
Reverse mergers vs IPO.
oy. i really dislike that approach. generally ends badly
Hi Fred,What about adding one on self-funding as well? Obviously the details are simple, but I would imagine you have seen this done well and not so well. Also I’m interested in hearing if a self-funded company is viewed differently when it is time to raise more capital.Best,Steve
Love to know what the difference is between venture debt and bridge loans
You left out what I did for http://carbonmade.com and that was consulting while we built up Carbonmade’s userbase and revenue. As we brought in more revenue, we took on fewer and fewer consulting jobs until we ultimately didn’t need to consult anymore.
BASECAMP USE SAME MODEL. IT GOOD MODEL.
Very nicely done (both financing strategy & the product)
That looks like a good series.. and doing them one by one.Just wanted to say how pleased I was watching John Rich take Celebrity Apprentice. John is truly a marketer, referring to the wonderful St. Jude’s every episode… you knew what he was after. Being a Lion in SE Missouri, we support St. Jude medical. What was also touching, being a Lion is Marlee Martin and her work with the deaf in the developing world.Have to admit disappointment where changing the rules to declare a standoff, awarding $250k to each did not happen. To me, that would have shown true wisdom.My suggestion for the MDA Telethon is to see if they could get Mr. Rich to consider being the new host.
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I love how you’ve now twice written a post about the upcoming posts. I have a feeling you’re not really excited about writing these.
not really. i’m trying to get my mind wrapped around this correctly before i start. i am excited to write them but it has to be done right
Which Category is Union Square Ventures?
This is a great list.
What about the boot strap nights and weekend option? Lots of great companies have been started that way…including mine.
That’s the best way but its not a financing option. Its the no financingoption
It is a financing option. It’s the self financing option. Maybe not worth its own post, but worth mentioning.
Fred, don’t forget a 2nd mortage, credit cards, and pawn shops! Depends where you want to be on the risk/reward ratio and how confident you are in your idea and ability to execute…
This is what scares me. My husband is starting an LLC to develop some iPad apps (hey, who isn’t??) and I’m not willing to risk anything I’m not willing to lose — i.e. our house, our retirement, my sanity… If you go for a SB loan do you usually need to use personal assets as collateral? Should we hire an accountant, financial advisor, etc? Any recommendations on how to find the right person?
If the business has no other assets except the IP and idea, you’ll definitely need to pledge personal assets as collateral for a bank loan. sounds like you just need to get comfortable with the risk/reward ratio and either give it a go (leverage friends and family for seed money, skip the next vacation, etc.) or decide it isn’t for you.
one way that has been working lately ( since i bought a book publisher) is to do a book in he area that the start up is going to cover its problems and the way his company will fix them have it published and then go do a press junkit and at the same time fundraise you have credibility and something people can read and not throw out
Thanks for these suggestions. I think this post will help new comers. Thanks for sharing.
As someone who has been in business for 25 years and attempting to create a “sized centric” B2C model based on a foundation of a B2B 20 year name brand big and tall tee shirt that we manufacture (think Cafe Press, Billabong, and Threadless only in big and tall sizes) I can tell you that this series has been more than helpful! I don’t have enough “friends and family” to redirect the business, no banks in our area are funding much past $250,000, and I have had 3 meetings with VC firms on the east coast but the reality is all of them were interested in picking my brains for information about much larger apparel investments they were making. Angel investors in our area want tech or health care and I have been fast tracked through one entreprenuer center and our local SBDC thinks I need to open a cupcake shop because they are “hot” right now. I have two municipalities with incentives lined up to offer me but without funding to grow inventory, buy equipment, and hire the techies they have to wait. So, I for one anxiously await every single article that you write on the subject!