Funding your startup idea
You have this wonderful idea, it's an app that pairs up your personality with the best dog type to buy. You do all your research on competition, you have a plan in mind, an idea that you want to get out into the world but how do you get the funding to pull of this brilliant idea?
Well funding is important and there are several ways to go about it:
Savings
Friends & Family
Crowdfunding
Angel investment/Partnerships
That's a lot of ways for you to get funding, but how do you know which is the best way, or at the very least the best way for you? Let me run you through the pros and cons of each one.
Saving
You might have a few thousand dollars in the bank or you might have a few million, but I’m betting you don’t have the second one otherwise you probably wouldn’t be reading this. If you have a significant amount in savings then this might be the way to go, but what's your idea of significant? 10K? 100K? 1 million? Maybe more? Applications can cost a lot of money to build and unless you plan on having multiple hundreds of thousands of dollars I doubt you will have enough to keep your dream alive.
You might be able to fund the whole thing entirely, but it completely depends on what you’re trying to build. If you just need to sell some candles, then you could do it for under a thousand dollars. Websites can be built on places such as Squarespace for cheap and they look incredible. However, if you're building something on the scale of Facebook you’re going to need hundreds of thousands of dollars.
If you have huge amounts of disposable money then this could be the best way to go, you don’t have to give up any equity of your company, yet you can still bring it to market. However, this is by far the hardest way to go as if requires you to have a lot of money in the bank which can simply be impossible depending on where you live and the current job you have. Not to mention the enormous risk this puts you in. If that money is your retirement or puts you close to nothing left in the bank then if your business fails then so might the quality of the rest of your life.
I like the idea of using my own money, it’s a way to not have family or friends involved. It gives you that sense of solo accomplishment that no other method could, yet it’s far too risky not to mention that most people simply do not have the funds to do this. Ask yourself this: “Can I spare a few hundred thousand dollars and be okay if it all evaporates and I never see a return? If you aren't comfortable with this then you should not go down this path.
Friends and family
One method that a lot of great businesses have started with, was the act of asking those closest to you for anything they can give. This relates very closely to the angle investing method, someone gives you an amount of money based on the perceived value of the company for a share of that value. With family and friends this can be the same or completely different, let me explain.
This approach relies on those around you having disposable income and either giving it to you from the goodness of their heart or for a share of the company. The problem with this approach is that it ties the success of your business to the relationship of those in which you borrowed money from. Can you look into your parents' eyes if you lost the $100k they gave you? Would you still be friends if your best friend loaned you money and you lost every cent of it with no chance of ever paying it back?
These are the sorts of questions you have to ask yourself if you’re going to ask for money from friends and family.
Funding websites
There are several websites such as Patreon, Kickstarter and Go Fund Me that allows you to put up a profile and people donate on a once-off or recurring amount.
These websites take a cut of everything that is donated but this method doesn’t give away parts of your business in doing so. This can be a great way to build up small amounts of and can be combined with savings. In my opinion, this isn’t the greatest way, these methods are primarily used for charitable funding or donating to unforeseen circumstances. These are also ways for artists or creators to get funding for their creative endeavours. This isn’t meant for starting a business although it certainly can be. You can create a profile, upload a business idea and plan, set a monetary target and see who donates.
This can be an easier way to get a moderate amount of funding as places like Kickstarter has created many successful companies, but these are usually physical products. If this is an approach that interests you then do note that if you use a place like Kick Starter these initial investors expect at the very least first access to the product or service that you are creating.
Partner up/Angel Investment
This method is pretty simple, find someone with a bunch of money and use that. One form of this is an angel investor. This is someone who will evaluate your business idea, your plan and you. They will calculate the value of your company which could be the same but often lower than what you deem it to be and offer you a chunk of money for a percentage of your company. An example would be I have web application idea that I deem to be worth $1 million, an investor might look at my plan, my idea and deem that it has a pretty good chance of success so they are willing to offer me $500k for 50% of my business which puts the value of my company at 1 million dollars. This way I get the funding I need but this investor owns 50% of my company at the same time. This is the best way to get large amounts of funding, your giving up something to receive something which isn’t the case in the previous methods I have talked about.
The major problem with this approach is that you have to find someone with a large amount of money or find someone who is in charge of an investment fund. Once you have done that you then have to convince them that they should invest in you and your idea. This can be the hardest approach but it has the biggest payoff. The more money you can get to start the more runway you have to create a successful company.
Which approach should I take?
In my opinion taking money from friends and family is risky, you can destroy relationships, you can put people in awkward positions, all in all, it's worst approach. Savings is probably the second hardest approach as it requires you to have quite a bit of disposable income that you might never see again, it does allow you to keep your relationships and your equity. Crowdfunding has seen success in the past, but it's also seen a lot of controversies. Many people have been burnt by-products never being delivered, by quick cash grabs that were nothing more than a scam, this is method is hard as well just like the rest but it can really pay off if you know what your doing, but it can be extremely hard to get the large amounts of funding required to bring your idea to life.
The final method is probably the tried and true best method, angel investment. Approaching someone who has a lot of money and is willing to part with it for a percentage of your company is the standard and for good reason. You can pick up a lot of money if you find the right person, you might have to give up a fair bit of your company but you get the runway you need to make it a success, you might also get some valuable business advice along the way.
After reading this I hope I have cleared up a few of the methods of attractive funding for your startup idea. It won’t be easy but if you get out there and give it a shot you might just bring your next idea to life.
Parting thoughts
Often people think creating a company costs hundreds of thousands of dollars if not millions. That's not always the case, with applications they can cost anywhere from a few thousand to a few million, it completely changes depending on what you want to build. I will cover this in a future article but your goal should be to get something to market for as cheap as you possibly can and as fast as you possibly can. This way you can test your idea and you won’t blow through all your money. Always keep this in mind, don’t go out there thinking you need a million dollars when you only need a few thousand.