You will need capital to take your amazing idea for a new business to the next level. But how in the world do you know which of the many funding options is right for you? By looking at the most popular options along with the pros and cons associated with each, that’s how. Here are some of the funding options you should consider along with the advantages and disadvantages of each.
Venture Capital Funding
Many of the biggest and most successful tech companies today would not be here if it were not for venture capital funding. This sort of funding may or may not be right for you, depending upon how big your business is going to be and what you plan to achieve with it.
Venture capital funding is ideal for business founders looking for millions of dollars — that is if they don’t mind giving up anywhere from between 20 and 40 percent equity. Venture capitalists have a professional responsibility to reduce risk as much as possible and they don’t typically invest in startups unless there is a rare combination of product opportunity, market opportunity and proven management. This sort of investment must have a good chance of producing a tenfold increase in business value within the first few years. Venture capital investment is focused on newer products and markets that can reasonably project increasing sales by large multiples over a short period of time. In short, if you have to stop and ask whether your new business is a possible venture capital opportunity, it probably isn’t.
Angel Investor Funding
There’s a lot to be said for an angel investor which is a wealthy individual who invests his or her own money in return for a piece of the action. Angel investing is very popular these days as these investors are being turned to more often for early stage business investing.
You can expect an angel investor to offer you anywhere from $50,000 up to $250,000 depending upon the size and type of company you’re running. Many businesses that receive angel investments already have some revenue but they need more money to push their businesses to the next level. Because their money is on the line, an angel investor is typically very interested in helping the business succeed.
On the downside, you could be sacrificing anywhere from 10 to more 50 percent of your business to an angel investor. Additionally, you run the risk that your investor will decide that you are not the right person to take your business to the next level wherein you could actually be canned from the very company you created.
If you determine that your startup venture is going to cost you somewhere between $500 and $50,000, you might like to consider a microloan. Many startups and new small businesses often find they don’t qualify for traditional bank loans as they don’t have the required proven track record of 3 to 5 years and/or established business credit wherein banks simply won’t take the risk.
Microloans are usually granted to businesses with smaller startup capital needs. Unlike traditional bank loans, this funding is typically provided via community-based non-profit micro-finance institutions. While anyone can apply for a microloan, these loans are often granted to people with low cash reserve or poor credit as well as to those living in rural or disadvantaged communities. However, many of the institutions which grant these loans also give them to women-owned businesses, environmentally responsible businesses and to veterans and specific business types.
Non-profits and other organizations have taken advantage of the advent and fast growth of crowdfunding platforms like Kickstarter as a viable means by which to acquire the money they need. Startup founders are also given a unique opportunity with this funding option as they’re allowed to sell their ideas directly to the consuming public. For startup founders, crowdfunding offers a great way to pre-sell a product or service to test the market.
This funding option can help a business owner get the money he/she needs without any of the “investors” getting any equity in the business. Instead, with crowdfunding, you’d be literally sourcing funds from a crowd. So rather than just having one sole investor or a handful of investors, you could potentially gain investment from hundreds of different people who want to support your growing business by investing a small amount to help you succeed.