Funding Options & Sources
When raising capital, there are several types of sources you can seek funding from (such as Friends & Family, Angel Investors, Venture Capitalists, and Vendors) and several types of funding arrangements that you can set up (such as Convertible Debt and an Equity Grant). This section will help you understand your options as you choose the appropriate mix for your business.
- Bootstrap & Self-Fund (1)
- Bridge Loans (1)
- Capital Equipment Loans (1)
- Contests & Prizes (1)
- Friends & Family (1)
- Government Grants (1)
- Performance-Based Warrant (1)
- Venture Debt (1)
- Working Capital (1)
- Accelerators & Incubators (2)
- Customers (2)
- Vendors & Lawyers (2)
- Equity & Preferred Stock (4)
- Venture Capitalists (6)
- Angel Investors (8)
- Convertible Debt (8)
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A whopping 60% of the Inc. 500 companies were bootstrapped on less than $10,000. No angel money, no seed rounds, no Series A. Bootstrapped to revenue growth which wins them an Inc. 500 award. I find this truly remarkable. Something to chew on, think about and reflect on... We might have an obsession with venture capital which isn't quite healthy anymore.
As a company grows, it starts to consume a lot of cash in the day to day operations of the business that has nothing to do with its profits or losses. This type of cash consumption is called working capital. In accounting terms, working capital is equal to current assets minus current liabilities. In layman's terms, working capital is what your customers owe you plus any inventory you have built up minus what you owe your suppliers and employees. Working capital also includes any cash you have in the bank.
Bridge loans are so called because they are a "bridge" to something else. They are short term loans intended to fund a company to an anticipated event in the future. In the startup world, bridge loans are a particularly interesting case to study. I've been in and around startups for 25 years now and I have rarely seen a bridge loan made by anyone other than an existing investor or investor group. Most bridge loans in the startup world are made to money losing companies that are going to run out of funds before they can close a financing or sale transaction. These are very risky loans that will not get paid back unless a transaction happens and often the transactions that are required don't happen.
Equity capital is expensive. Every time you do a raise, you dilute. It makes sense to look for places where you can use other less expensive forms of capital to fund growth. As we talked about in the last post in this series, I'm not a fan of debt for an early stage startup because there is no obvious way that the debt is going to get paid back. But capital equipment provides an opportunity for debt financing because you can borrow against the equipment. There are two primary ways to do this, capital equipment loans and leases.
If there were two words less likely to be found together, it would be venture and debt. Startups are not credit worthy enterprises. They have little to no assets and no cash flow. Equity is the appropriate way to finance startups. However, there is a large, growing, and vibrant market for something called Venture Debt. It is indeed debt, largely provided by a number of banks and finance companies who specialize in this market. The terms are usually three years, interest only, balloon payment, with warrants for the equity kicker. Now that I've just thrown out a bunch of buzzwords, I'll explain each of them.