While the cost of launching a startup continues to fall at an exponential rate, there’s still a cost involved -- and as such, there’s still a need for funding. Investing time in employees to help build and market products, as well as on accountants and lawyers to ensure regulatory compliance, are all important costs that require many entrepreneurs to explore fundraising options.
So, where should an entrepreneur go to raise funds? Below is a breakdown of options, in order of priority:
'If you choose to bootstrap -- meaning self-finance and do things very cheaply -- you can retain control of the business and your personal life,' says startup lawyer Jean Sifleet (this is the route our founders here at Grasshopper took).
Indeed, the more entrepreneurs are capable of being financially independent, the lower the barrier to long-term profitability or a lucrative liquidation exit will be. Existing savings, as well as taking on freelance work, can be appealing options -- and indeed may be the most preferable options for many low-cost startups.
2. Friends, Family, and Fools.
In the age of LinkedIn and Facebook we all have a social network we can pull from and draw upon. And so founders may find it worthwhile to ask: who in their social network can they tap to be investors? Consider raising your initial capital -- perhaps up to $200k -- from the three F’s: friends, family and fools,' says entrepreneur-turned-venture capitalist Mark Suster. While VC money is widely desired and can lead to much in terms of publicity and connections, it is not appropriate for most startups, and overkill for those with immense potential but just getting started.
And don’t forget about crowdfunding! You can use crowdfunding sites like KickStarter or Crowdtilt to raise money from your friends, family, fools and even strangers who simply just believe in your idea!
Most conversations about fundraising center around equity or debt investing -- meaning getting an investor to give you a loan or buy a piece of your company. However, getting paying customers is another option -- and one that does not involve startups giving up equity or dealing with complicated relationships with investors.
'Customers are a great way to finance a business,' says venture capitalist Fred Wilson. 'In addition to capital, they also help you fit your product to the market and can give you credibility with other customers -- in addition to possibly spending more with you if they are satisfied.'
4. Go Pro.
Finally, after exhausting your own capital, your social network, strangers and customers, entrepreneurs can look to 'go pro' -- meaning get investment from accredited investors. Some entrepreneurs may find it worthwhile to pursue incubators -- like the highly touted YCombinator and TechStars programs, designed to give firms a small amount of capital coupled with greater mentoring from a network of seasoned operators.
Whichever option you decide to take, make sure you realize that fundraising is a time-consuming process and can be frustrating. Customers, friends, and professional investors will all require trust and a belief in the startup. Earning this trust is essential to generating capital, and it will take time to build. So, even if you're not planning on needing to raise funds immediately, it is worth starting the process early on so that you have a solid foundation of trust when it comes time to make your pitch.