If you watch Shark Tank, you might get the impression that all start-ups obtain funding from private investors. In reality, entrepreneurs get their new businesses off the ground with self-funding or bank loans (see Five Cs of Credit).
But let's take a look at three other ways of funding: crowdfunding, angel investors and venture capital. Who knows? One of these may be right for you!
This is exactly what it sounds like – a crowd of people give funds to help you start your business. Crowdfunders usually expect a gift, like a sample of the product you sell, or some special perk. You do not have to repay the contributions or give up any ownership. So this method is a low risk for you; however, be sure you know what you are getting into. Check the fine print, as every crowdfunding has its own legal and financial obligations. Kickstarter and Indiegogo are two popular sites to help. Here's an SBA article that might help, too.
Angel investors will put money into a “startup or early-stage business that may not have the demonstrable growth a VC [venture capitalist] would want," (Business News Daily 2019). In addition to money, you receive guidance and assistance from your angel – something that can help you avoid mistakes, take shortcuts, and save you time, effort, and money. Angel investors expect a return on their money; they are making a loan to you. But they do not seek ownership or equity.
Venture capitalists look for high growth companies with the potential for higher returns. In exchange for their investment, they expect ownership and to play an active role in your business. They become your partners. Again, think Shark Tank.
Just to keep this in perspective, it's more likely you will fund your business through your bank or personal savings. Looks at these statistics about startup funding sources:
Traditional loans (banks), personal savings, friends and family, and credit cards account for roughly two-thirds of start-up funding. Notice, crowdfunding did not even make the chart (Kaufmann Foundation, 2015).
Funding your start-up through crowdfunding, angel investors or venture capital is very rare (maybe a total 2% of start-up funding), but they might be right for your small business. Whether you seek funding through a loan from a bank of through the other options above, it is wise to consider the implications of the 5 Cs. If you want to learn more about your funding options, send us an email or request for consulting!
The Duquesne University SBDC provides free business consulting for entrepreneurs in the Greater Pittsburgh area. Click here to request free consulting, or contact the SBDC for additional help and information.
Don Lodge is a Business Consultant at the Duquesne University Small Business Development Center (DUSBDC). He is also a certified business coach who has worked with over 100 small business clients since 2002. His areas of expertise include profitability improvement, effective sales techniques, and employee relations.