According to Forbes, 8 out of every 10 businesses fail within the first 18 months.
The main reasons start-ups don’t succeed are:
1) Simply not having enough cash, and
2) Not having a profitable business model with proven revenue streams
Whether you’re a first time start-up or a seasoned entrepreneur, there are lots of ways to get funding: from venture capital, to angels, to crowdsourcing, to start-up loans.
VCs take a more formal approach than angel investors. VCs focus not just on start-ups, but on companies that promise huge growth and scalability. The recent industry focus for VCs has been on tech, biotech, entertainment, and media. VCs offer the highest amount of funding, which is why they require the most amount of paperwork. Make sure you work with an attorney and accountant before presenting your application to VCs.
Angels invest mainly in start-ups of companies in the very early stages.
Applicants for angel funds should have a:
- A product near completion
- Specific potential customers
- Proof of having tried other funding methods
- Expectations of fast growth and high revenue in the next 3-7 years
Most angels use their own money. According to the Center for Venture Research, 70,730 entrepreneurial ventures were funded by angels in 2013. Total investments in 2013 were $24.8 billion, an increase of 8.3% over 2012.
The top industries that angels invest in are software, media, healthcare, biotech, fashion/retail, and financial services.
Small Business Administration (“SBA”) Loans
Both the quantity of SBA loans to start-ups and the dollar amount is larger in 2014 than it has been in the past three years. The SBA works with local lenders to guarantee loans.
SBA loans include:
- 7(a) General Loan: up to $5 million, with an average of about $425,000.
- Microloan: Up to $50,000, but the average loan size is much smaller.
- Real Estate & Equipment Loans: Up to $5 million, based on a showing of expected job creation, improved public policy efforts, and increased manufacturing needs in the community.
Crowdsourcing is another way to get some capital, but it comes with limitations. Businesses can’t use the funds raised through crowdsourcing for general operating expenses, only for specific projects, products, or market research. If you raise funds through crowdsourcing, you’re encouraged to offer rewards to funders such as promo items or other perks, but never cash or shares in your company.
Crowdsourcing via Kickstarter has benefits for investors. It has an all-or-nothing approach, meaning if the project doesn’t get completed then backers aren’t charged. Which equals less risk for everyone. Besides kickstarter, other crowdfunding platforms include Indiegogo, Crowdfunder, and RocketHub.
What type of funding are you using to fuel your business? Put your questions or replies in the comments box at the bottom of the page!