Funding a StartUp

So, you have a great business idea and you want to learn about how to get funding? My experience tells me that there are lots of variables that determine if your idea is fundable or not (not the same as if it is a good idea). There is a hierarchy of funders and as you move up the scale, the available dollars are larger but the “strings”, scrutiny and control are also more onerous.

At the first level is “friend and family” investors. As the name implies, these are people who know and trust you, like your idea and are willing to invest to earn a modest return but more importantly to help and support your dream. The only real expectation is that there is a chance of getting their investment back and they usually like to see that you have invested your own money as well. Next on the ladder are high net worth individuals who are not syndicated in anyway. These individuals are hard to find but often have family investment fund managers who may or may not make themselves publicly known. The hurdle here is finding them and getting their interest in your business. A profit is expected here but much more modest as compared to those on higher rungs of the investor ladder.

Angel networks are typically syndicates of these high net worth individuals. These groups want to earn a large profit in order to compensate for other investments that may not have been losers. They want more control, often times in the form of a board seat, key position hiring and a preferred position during liquidation. They also may require an anti-dilution clause and also may require the restructuring of the business if it is not in the preferred legal form. Venture Capitalist are the next step above the Angel network. They have many of the same requirements but VCs often will invest significantly more (several million dollars). They look for a company valuation that meets their hurdle and are much more rigorous in their due diligence. Banks are also a possibility to gain funds for your business in the form of debt. All bank debt covenants apply and their risk profile is typically very low or the interest return is very high or both. Finally, the emergence of crowdfunding sites, like kickstarter and crowdfunder, have provided another avenue to gain funding.

There are specific rules around accredited and un-accredited investors that must be adhered to. Depending on how much you are trying to raise, you may end up with multiple small investors that will need to be managed. Each of these options have pros and cons and must be researched further to find what’s appropriate for your business. I found a great, albeit obvious to some, blog on what to look for in an investment partner. For more on startup investment and market trends, CB Insights is a good resource.

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