How to Fund Your Business Idea or Startup: How to Raise Capital

Do you have the money you need to build your business, or do you need to raise it?

This is one of many important decisions – to use your own money, or to use somebody else’s. There are pros and cons to both sides which we’ll explore below.

• Should I use my own money?

• Should I raise money from venture capital sources?

• Should I use crowdfunding sites to raise money?

• Should I borrow the money I need?

• Should I ask friends and family for capital?

• What about government loans and other grants?

• What are the pros and cons of each?

• How much money do I need to raise?

• Should I use my own money?
  If you use your own money, or borrow it (instead of finding investors) – these options generally mean you’re in charge of how the money is spent, and importantly, you retain full ownership and control of the business. The downside of this is that you’re taking all the risk (that’s why you retain full ownership – you’ve taken all the full risk).
  
  This is the part where I want to be REALLY REALLY CLEAR:  Remember – about 50% of new businesses fail within 5 years, which means there’s a huge chance you will lose the money you’ve put into your company eventually. Worse, if you borrowed that money, you could be stuck paying it off for years even if your business has died long ago. That’s pretty painful. 🙁

   

  If however, you raise venture capital from investors, they will own a portion of your business, since they have taken some of the risk –  and they will seek to help you make decisions about how you spend their money and run the business. This isn’t necessarily a bad thing, which we discuss further below.

  I opted to use my own money with all the businesses I started, simply because I didn’t want anyone telling me what to do. But there are plenty of reasons why having good investors is amazingly helpful, so either choice can work, you just need to understand the pros and cons and do what makes sense for you.

• Should I raise capital from venture capital sources?
  Some people say “never use your own money, let someone else take the risk” and others say “never give up any ownership and control of your company unless you have to”.  So what should you do?

  A lot of people want to try venture capital, and you will need a great pitch deck to raise capital this way. You’ll need to practice your pitch and talk to a lot of people probably.

  Consider joining a startup incubator. Incubators are groups of startup businesses that receive various kinds of support from seasoned mentors, and belonging to an incubator can really help you find VCs to pitch to. Usually in incubator takes a percentage of your equity in exchange for helping you to grow in the early stage

  If you are able to get investors to fund your business, you’ll need to give them a percentage of ownership. You’ll need to listen to them when they have concerns or advice.

  You will be able to ask them for help when you need it, to make introductions or to make important decisions. This is part of their role, as well as providing capital. They want to see you succeed so they are on your team and will do what they can normally to help with anything you need.

  Also, an important mistake many new founders make is that they are underfunded. They don’t have enough money to build the business, operate it and market it for long enough to gain traction and clients and become successful.

  Venture capital (VC) money can be really helpful in this regard because they know that and they don’t want to underfund you.

  They will often participate in follow-on funding rounds as needed and help you find other VC partners to help fund any follow-on rounds.

  But you’ve given up a good chunk of your business ownership – easy close to 50% in many cases… so if there’s an acquisition down the line, you will have to share in the profits.   

   

• Should I use crowdfunding sites to raise money?

  Crowdfunding is an increasingly popular option.

  The idea is that you use sites like  Kickstarter or GoFundMe or any of many others that are similar – and you pitch your idea to anyone who sees your page, and you promise them something in return for their investment of say $25 or $200 or whatever. 

  Once you reach your stated goal, within a stated time period, the people who agreed to fund you are charged for their contribution (often via credit card or Paypal, etc.). If you don’t reach your target goal, they aren’t charged and you get nothing. 

  There are a lot of people online giving advice (check YouTube or Google) on how to run a successful crowdfunding campaign and hit your target.

  It’s great because you don’t give up equity in your company and you don’t have to pay back the capital.

• Should I borrow the money I need?

  I don’t recommend loans because a lot of first time businesses don’t work out and I hate to see a founder with a dead business that didn’t work, AND a hefty loan to pay back.

  I really like to try to start selling product very quickly to make sure that you can sell it and there’s a market, and use that early profit to continue to grow the business, and so on, instead of borrowing if possible.

  Venture capital, crowdfunding, and friends and family capital are the other three main non-loan options. 

• Should I ask friends and family for capital?
  Some founders like to ask family and friends for a loan or an investment in their business.

  Perhaps you have a family member who can afford to give you what you need, say $1K or 10K or $30K or whatever… to help you get started.

  This is an interesting option because on one hand, the person can write you a check and you can get busy working on your business quickly. On the other hand, you may end up having hard feeling with that person if they thought you would make money and pay them back, or help them make a healthy return on their investment.

  Perhaps the person who lent you the money is OK if you aren’t successful, but maybe their close family members hold a grudge. Money issues are the most certain way to create bad blood amongst family members.

  If you go this route, make sure to write up an agreement on paper that addresses things like does the money need to be paid back, is there a timeline, what are you promising, if anything, to this person?

  My advice is to have an agreement that says “I promise nothing, aside from my intention to do my best to make the business succeed, but that as the person funding the business, you agree and fully understand the risk of losing all your capital, since many new businesses fail.” or something to that effect.
  
  You need to be sure that the person funding you understands there’s a good chance they could lose their money, which helps to keep misunderstandings from arising if you can’t make the business work.

• What about government loans and other grants?
  Small Business Administration loans are not easy to get. A lot of people consider them among the harder loans to get. They often require more documentation and a longer application process than other loans. You can read a lot more on SBA loans here.
  
  Aside from SBA loans, there are also grants. A grant is an investment, often with few strings attached, that is given to a help fund a new business that qualifies for the terms of the grant.

  
  For instance, maybe a wealthy person funds a grant for a new music business that helps teach young people to play music. Maybe the grant originator has a soft spot for teaching young musicians, and wants to promote businesses that help in this area. 

  Online you can find grant listings that show the requirements, the amounts, important dates for applying etc. 

  It’s a potential avenue, but there are a lot of people sometimes who apply and the timeline may or may not work for you. It’s worth a try though, it’s basically free money if you can win a grant.

• What are the pros and cons of each?
  The above discussions cover this question.
• How much money do I need to raise?
  This is a really long and complicated question, but the short answer is that basically you’ll need to create a spreadsheet that forecasts all your expenses to build your business, run it, pay whatever salaries you need to pay, and market the hell out of your product until it starts turning a profit that allows you to be self-sufficient.

  
  Another way to say it is that however much you think you’ll need, you should probably double or triple it 🙂 !