Start-ups and funding - a love-hate relationship

Nobody questions that start-ups, at some point or other, are always in need of funding. From a few dollars to millions of it. As a budding entrepreneur, this could very well seem overwhelming, especially when financial analysts and consultants start giving you advise.

This article is a good starting point to get at ease over the topic. Remember that it is you, as the entrepreneur, that gets to call the shots. Most investors and consultants want you to make believe otherwise  - it is my money and I do as I please - yet the entrepreneur has always the possibility to say no. Of course, he then might lose his funding but this could be better than to adapt a failing strategy for his company.

Point number 4 raised in the article seems to sum it up quite nicely.

The Non-Entrepreneur's Guide to Startup Funding

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A few months ago, I wrote “The Non-Entrepreneur’s Guide to Starting in Startups” with the aim of helping those wanting to break into the entrepreneurial world. Now, let’s assume you’ve done your reading, attended events, have identified a solution to a specific problem, and are ready to start testing your hypothesis. What is the optimal path to gain the necessary resources?

Before we get into specifics, here are six factors to consider:

1. Risk vs. Reward: The more equity you give up, the more you diversify your risk and decrease your potential reward.
2. Control: Who holds the power to make decisions about leadership and company direction?
3. Velocity: How much funding is ideal for you to reach your desired outcome? How fast do you need (not want) to grow? Too many resources can be as damaging as not having enough, allowing you to pursue poor directions for extended periods of time.
4. Distraction: There’s a reason why good decisions aren’t made by committee. Those with a material interest will want to be informed, understand decision-making, and, in some cases, help make decisions. Hours dedicated to those activities are hours not spent building and selling.
5. Mentorship: Wise and experienced mentors are anything but a distraction, providing knowledge that can bypass months of wrong turns and setting you on the path to success.
6. Influence: Regardless of your business, deep relationships are practically priceless. Who can place a call to an old friend and open a golden door?

With those factors in mind, here’s a guide that covers the most-to-least autonomous options. As a reminder, the information below is intended for those new to the startup world, and is not intended to be an “end-all, be-all” of funding knowledge. If you’re looking for depth, jump to the end for a list of resources that dive into each area in detail.

Personal Assets (Bootstrapping)
Overview: Bootstrapping means not taking any outside investment and funding the startup 100 percent from the entrepreneur’s personal assets and business cash flow.
Consider: How many resources do you need now? What is your ability to fund the project now? What is your risk tolerance? Assuming the project fails, are you okay with the position you’ll be left in? Should the business generate enough cash to become self-sustaining within a reasonable timeframe?
Optimal for: Those with a high-risk tolerance, a high net worth, or who need low necessary startup funding (or a combination of all three).

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Look to: Your bank account and intestinal fortitude.

Consulting (Bootstrapping)
Overview: Using your professional skills to launch a consulting business with the primary aim of supporting your startup.
Consider: Will consulting ultimately distract you from your primary purpose? Can you adequately juggle multiple projects at once? Are you disciplined enough to ignore “paying work” for your startup? Can your potential clients’ work provide the code base or intellectual property for your startup (ethically, of course)?
Optimal for: The risk-averse, the skilled (hirable), and the disciplined. As Chris Guillebeau, author of the “The $100 Startup,” says, “Bootstrapping is fair game for most startups other than manufacturing or medical research, which require more funding.”
Look to: Relationships with potential consulting clients and your psychological profile.

Crowdfunding
Overview: A crowd of people pre-buy your product, providing you with the cash to get the product built. No equity or debt is exchanged (to change shortly with new laws).
Consider: Do you have a consumer product? If so, do you have a way to make it stand out in the crowd? Will the time investment of promoting the microsite be worth it?
Optimal for: Sexy consumer products with mass appeal.
Look to: Indiegogo and Kickstarter.

Friends and Family
Overview: Use your family and close personal relationships to gain access to resources. Their primary motive for investing is you, and not necessarily a return on their investment. Typically, this is considered “early seed stage,” and it consists of funding between $10,000 and $50,000.
Consider: Will this harm personal relationships? Will this be an unnecessary distraction? How important is the money to the investors? What are the ramifications if the startup fails?
Optimal for: Those with wealthy friends or family who love them dearly, are supportive of their endeavors, are looking at it more as a gift than an investment, and are comfortable with the startup’s likely failure.
Look to: Personal relationships, the ability to have “difficult conversations” with friends and family, and comfort in likely celebrating an awkward Thanksgiving/Christmas.

Accelerators
Overview: Typically, a 12-week program that combines light funding ($15,000 to $50,000) and mentorship to accelerate the startup’s progress. It usually culminates in “demo day,” where the class of startups give short (under 10-minute) presentations to a group of angel investors and VCs.
Consider: Does your startup have high growth potential? Outside of Y Combinator and TechStars (field leaders), how established, successful, and focused is the program? What has been the experience of founders in the portfolio? How specific are they about the programming, mentors, and expectations?
Optimal for: Startups with high growth potential looking to gain access to a network of mentors, capital, and influence.
Look to: TechStars and Y Combinator first. Read extensively on the accelerator’s philosophy, track record, and mentor bios.

Angels
Overview: Wealthy people with an interest in funding startups. They sometimes assemble into packs known as “angel networks” or “angel groups,” where they consume copious amounts of food and drink, review past investments, and listen to new pitches asking for $300,000 to $750,000 in seed funding.
Consider: How much are you looking to raise, and why? What expertise do the angels (especially the ones who might serve on your board) represent? What is the person’s or group’s track record on exits and past relationships?
Optimal for: High-growth startups that need early-stage capital to accelerate traction, and those looking to acquire money and perhaps a little expertise (in most situations).
Look to: Local groups of angels, AngelList (Angel.co), Gust, or known independent angels in your area.

Venture Capital
Overview: Professional investors looking for significant returns, who represent large sums of institutional money (universities, municipalities, and larger funds).
Consider: They’re pros at investing, and you’re not — be careful. What else will they provide other than money (smart money)? Do you align philosophically? Are their expectations reasonable? Do they have a strong track record in your sector? Have you talked with CEOs in their portfolios? Have you spoken with multiple firms?
Optimal for: Startups with significant traction that are looking for massive growth and are fine with giving up quite a bit of control (in most cases).
Look to: Relationships that might have connections with VC firms. Google “venture capital” and start researching; then, contact specific firms that are actively looking for investments in your sector. *Note: Do not blanket the entire VC industry with a general introduction letter.

Banks, Incubators, and Co-Working Spaces
Three other sources could be banks, incubators, and co-working spaces, but I have intentionally chosen to leave them out. Banks are highly regulated and need both collateral and a clear repayment path in order to provide a loan. Although some claim to offer good advice, unless you’re starting a construction company or looking to get into real estate, I’d take it with a grain of salt. While some make claims that sound similar to accelerators, incubators and co-working spaces are rent-driven and usually don’t come with a tremendous amount of “value added.” They are fantastic for networking, but don’t count on them to offer nearly the same resources as an accelerator.

Further Research
As I said, the purpose of this article is to help give the newcomer a framework for exploring the world of startup resources. I highly encourage anyone thinking of starting a business to do a lot more research. Here are a few places to start:

• Chris Guillebeau’s “The $100 Startup”
• Paul Graham’s Website
• Brad Feld and Jason Mendelson’s “Venture Deals”
• Steve Blank’s Resource Center (under “Founding/Running a Startup Advice”)