Small-Business Roadmap Intro: Funding Options for New Companies

As I type this, there are countless entrepreneurs around the world dreaming of unicorn-level success the way a 12-year old pageant participant dreams of flashbulbs on the red carpet. Like those pageant-goers, the majority of our dreamers won’t reach the meteoric levels of success they envision—which is not to say they’ll fail, just that unicorns aren’t a dime a dozen.

Over the course of the upcoming series, G2 Crowd’s research department will be considering the different stages which a small business might find itself on the road to prosperity. Along the way, we’ll talk about relevant strategies that may facilitate achievement.

For the purposes of this introduction, though, I’ll go over a few different small-business funding methods because without funding, building a mammoth-sized business can be an insurmountable task.

Angel Investor

Over the past decade or so, angel investors have made their way into the cultural zeitgeist. Part of this is due to the celebrity garnered by tech entrepreneurs; it’s not inconceivable that Evan Spiegel would draw a bigger crowd at a party than, say, Brad Pitt. The other reason angels are on the tip of our tongue more now than 20 years ago is that they’re actually more prominent.

Because software and technology is so widely accessible, building an initial product (especially a tech product, like an app) is now an affordable endeavor. You can develop a product and take it to market without ever having to deal with a manufacturer (again, depending on the product).

Generally, angels invest smaller amounts than venture capital firms—with fewer strings attached—in order to help an entrepreneur build an initial product. In return, they often demand a percentage of equity in the company. Given that their investments are generally designated to develop a product rather than build a company, angels mostly team up with small businesses in their nascent stage.

Venture Capitalist (VC)

There are a lot of similarities between receiving an investment from an angel investor and a venture capital firm. It may be helpful to think of a VC as a more mature version of an angel, though this is not always the case. While an angel’s investment is generally geared toward product development, VC investments are geared toward building the company around the product.

This being the case, VCs normally invest more money into a company while getting more in return, such as a seat on the board. These differences often mean that a more mature company will look for investments from a VC while younger ones may look for an angel. It’s also worth noting that many companies’ first investment came from an angel, and subsequent ones from a VC—Domo, for example.

Crowdfunding

It’s appropriate that one of the most notable crowdfunded businesses is Oculus Rift. Before it was acquired by Facebook for $2 billion, the virtual reality headset creators raised $2,437,429 through the crowdfunding platform Kickstarter. Crowdfunding a business is about as millennial-centric as starting a virtual reality business, but still, this method for funding is plenty valid.

Similar to receiving money from an angel investor, this strategy is generally more suitable for a small business in the early stages. Often times the crowdfunded money is used for creating a prototype, but the nature of crowdfunding is such that you can use the money as you please. With this strategy, you pitch your idea or business plan on a crowdfunding platform, and individuals can make contributions to your campaign. Often times the solicitor will offer rewards to contributors to incentivize funding. This funding strategy is not right for everybody, but businesses with highly shareable and unique products can flourish using this method.

Bank Loans

It’s easy to gloss over the idea of funding your small business via bank loans. It’s a strategy that lacks the panache of a huge round of funding from a VC on Sand Hill Road, but it’s certainly a viable method for growing your small business into a behemoth. Entrepreneurs taking this route often don’t have the explosive growth seen by some unicorn businesses, but there’s no shortage of businesses that have excelled taking money from the bank, Starbucks being one that comes to mind.

Unlike an investment from a VC, you’ll have to pay back the money the bank gives you, plus interest, but the bright side is you’ll get to keep your company’s equity for yourself. This strategy is one that fits a business with a plan for slower and more methodical growth. Also, since you’re going to be paying the money the bank gives you back, revenue and profitability should be front of mind, which isn’t something that can’t always be said for companies in the Silicon Valley.

Family and Friends

You’ve probably heard the advice “don’t go into business with family or friends.” The stresses applied by introducing money into these types of relationships are sometimes enough to ruin them, but that doesn’t stop people from continuing to ask. Many businesses get their start thanks to a little help from mom or dad or even a good friend. Not everybody has someone close to them they can go ask for thousands of dollars from, but for those who do, it may not be the worst option. Family and friends may be more forgiving than banks when it comes to things like interest rates and late payments. You’ll just want to make sure you keep this arrangement professional, so as not to drive a wedge between yourself and whoever you’re indebted to.

Bootstrapping

We’ve covered several ways to fund your business, but this strategy is one that requires no fundraising at all. Bootstrapping your business refers to building it up from scratch with no help from investors. It sounds daunting, and depending on your business may be impossible, but some have done it before. TechCrunch, for example, was started by Mike Arrington and Keith Teare. They took no money from investors before eventually selling it to AOL in 2010. If possible, this is certainly an alluring strategy since you have to sacrifice nothing when it comes to autonomy and equity.

It’s important to note that these strategies are not mutually exclusive from one another. Most highly successful companies have taken part in multiple funding strategies, which is to say there’s no one correct way to fund your small business, in fact, there’s probably several

Small-Business Month

For more reading during G2 Crowd's small-biz month, visit our small-business blog page.