Written by Elana Fine, originally published by the Washington Post‘s Capital Business column on September 11, 2011
Companies all experience growing pains, but for startups much of the early pain has to do with finding funding. After you’ve maxed out your personal credit cards to kickstart your great idea, now what? There are sources for funding out there — you just have to know who to turn to next.
1. Friends and family
This option is a critical first step for startups raising capital. If you can’t persuade your closest friends, family and colleagues to invest in your idea, it may be difficult to raise funding from strangers. But you don’t need a wealthy uncle ready to write blank checks. Funding from friends and family can come in small increments, even $1,000 or less, to fund your most immediate startup needs. Take Silver Spring-based Hook & Ladder Brewing Co., for example. When the business first started out (full disclosure: founder Matt Fleishman was a University of Maryland MBA student at the time), it initially needed just enough money to brew that first batch of beer.
When trying to raise money from friends and family:
·Formalize the process: Seek the advice of a lawyer to make sure you’re structuring the financing correctly.
·Don’t give away the pie: Make sure you don’t give away too much equity, especially at such an early stage. Maintain strong ownership. This will be important down the road — and could make you more attractive to venture capitalists.
·Think beyond your immediate circle: Tap into your professional network and those who know your business.
·Make it formal: Create a pitch presentation and prospectus for potential investors to show you are serious and your business is legitimate.
2. Grants
Find an organization that fits with the goals and mission of your venture and research available funding opportunities and grants.
·Plan your growth strategy: Tackle business applications that align with grant opportunities. For example, if your technology has applications that could be used by the military or in health care, pursue those verticals first. There are lots of grants available from the Defense Department, National Institutes of Health, National Science Foundation, etc. to help develop new technologies with those types of applications.
·Find a mentor: Consult with a company that has similar qualities to yours and a founder that can shepherd you through the grant process.
·Don’t forget local organizations: Beyond national and federal grant opportunities, local and regional business and tech organizations may have money available. For example, Maryland’s Maryland Industrial Partnerships program accelerates tech commercialization by matching funding with research from University of Maryland System faculty.
3. Customers
Often overlooked as a funding source, your customers can be a great source of funding if they are willing to pay you to develop a custom solution or product that you can then use to fuel additional growth and sales. An added benefit: You won’t dilute your stake in the company.
4. Angel investors
When you are close to having a finished product ready for market and have some early customer traction, you may be ripe for an angel investment — usually seed funding between $150,000 to $1 million.
·Find an angel investor group and get involved: Start attending meetings to network with investors, even if you’re not ready to pitch.
·Be creative and entrepreneurial about how you raise money: Research the investors involved in various groups, know the types of companies they invest in, and figure how to best pitch them.
·Start early: You should always be raising money before you need it. Think at least six months ahead and plan.
·Don’t undervalue “smart capital”: Beyond dollars, investors have a lot of advice they can provide to your startup. Many are seasoned entrepreneurs and have been down your road before.
5. Venture capitalists
Venture capitalists and venture banks invest in companies that have a high potential for significant growth. VC investments are usually no less than $3 million. If you’re up to this point in the funding process, make sure the VC has a compatible approach to building a business and has a good network that will help you grow and realize your full potential.
Not all of these sources will be right for every company. As you grow, continue to refine your business plan. And don’t get discouraged: There is still funding out there — you just have to know where to turn.
Elana Fine
Elana Fine joined the Dingman Center for Entrepreneurship in 2010 as the Director of Venture Investments. In this role, Elana manages the Dingman Center Angels, a network of active, accredited angel investors providing open and efficient access to early-stage capital for entrepreneurs in the Mid-Atlantic region. Her responsibilities include identifying quality start-ups, screening deal flow, conducting due diligence and providing coaching for companies presenting at monthly review days and investor meetings. In addition, Elana is responsible for program expansion including new investors, sponsors and forging regional partnerships with incubators and technology organizations. She has recently become the Associate Director of the Dingman Center for Entrepreneurship.
