Foundations of Capital Funding
Capital funding #1 - Friends and Family
Depending on the type of business you want to start or idea that you're seeking to scale - you may need more initial funding than you can cover yourself.
That is where financial capital (debt or equity) comes into play. Over the course of this week, I'll share an overview of the types of capital you can access and how.
Up first is the capital often deemed easiest to access and referred to as the "friends and family round". There are tons of articles and evidence that illustrates that tapping into this for diverse founders is frequently more challenging.
Nonetheless, these people are likely to be the first in line when you launch. They are likely to believe in you and your goals. Now, I'm not suggesting you borrow 4 figures from your uncle and never pay him back. I advise you to treat these loans or equity checks as formal agreements. Agree on terms of repayment, if interest will be accrued, and how long you have to pay back the money. Equity is a bit more complex -you've got to place a value on your company and develop shareholder agreements, but can be a useful lever if investors can be essential to growth. I would caution you from giving up too much ownership too quickly as it dilutes your interest as a founder.
Capital Funding Options - Crowdfunding
Crowdfunding is the practice of funding a project or venture by raising small amounts of money from a large number of people, typically via the web/internet. It works great for product-based business and can reach far beyond your immediate community via online marketing.
In traditional crowdfunding, you offer a first-run product or incentives in exchange for a monetary contribution. Contributors receive no equity and are generally (I say generally because newer models have evolved) not repaid.
A new option called "equity crowdfunding" is made possible under the Jumpstart Our Business Startups (JOBS) Act.
Here's how it works: if I have a pie (company), I divide it into slices (shares) in exchange for cash, expertise, etc. Equity holders benefit as a company does well, but can lose their investment if a company goes under.
While crowdfunding can be an option for capital raising, all platforms are not created equal, so do your research.
- Cons: You will likely pay fees, which can vary from 3-10+% depending on the size of your campaign. A failed campaign can follow you to other investment opportunities.
- Pros: Established portals provide access to investors outside your sphere.
Capital Funding Options - Venture Capital and Angel Investments
Typical investments frequently range from $25,000 to $250,000. Because angel investors operate with a smaller, less formal structure, they can have widely differing expectations of the terms of an investment. While getting a large investment offer is exciting, you need to make sure it's best for you.
These investments, unlike traditional crowdfunding, come with an expectation of equity - some form of ownership of your company. It is the trade off for the investor taking a chance on your idea or concept early on. For example, venture capital at the early stage can be highly risky with a complete loss of your investment. However the upside can also be tremendous for the angel investor.
Marcus Lemonis from the popular tv show "The Profit" is considered an angel investor.