Capital is oxygen for startups. Yet considering that breathing pure oxygen can kill you, it’s important to get the right mix of funding el
Capital is oxygen for startups. Yet considering that breathing pure oxygen can kill you, it’s important to get the right mix of funding elements to give your business the best chance to succeed. That right mix of funding sources needs to add up to enough to make sure your new business gets off the ground. Depending on the business model, the average startup cost for a small business is anywhere from about $10,000, according to Intuit QuickBooks, to $31,150, according to an oft-cited Ewing Marion Kauffman Foundation survey from 2009.
Fortunately, there are numerous ways to fund your startup, and you should have a variety of funding sources rather than putting all of your financing eggs in one basket. Just as investors compile diversified investment portfolios so they don’t have all their money tied up in a few stocks that could lose their value quickly, so startup founders should seek several funding sources so that if anyone source has problems, they can pivot and rely on the others.
Having a diversified funding pool won’t guarantee success — it’s just one component of many that go into your company’s success or failure. But given how tough entrepreneurship can be, you need to give your startup every chance it can get to grow. Here are a few things to keep in mind about the sources you can tap.
1. Begin with yourself.
You don’t need venture capital to get your business off the ground. GitHub’s three co-founders, for example, each chipped in to launch the business, working on weekends until their side hustle was ready to become a full-time gig. Now the software development platform has more than 3.4 million users. You, too, can start funding your venture with your own bank account (or credit cards, or couch cushion coins). Throwing some of your own money into the mix is a great way to show others that you are serious and committed about your startup. In fact, many Small Business Administration lending programs require founders to tap their resources before they will offer loans.
If you don’t have significant savings built up, you can borrow, but keep in mind that the younger your company is, the more expensive debt financing terms will likely be. Should you opt to put expenses on a credit card, look for one that offers a 0% introductory interest rate for the first year and gives cashback for business-related purchases. Of course, ponying up your own cash comes with the risk that you will lose it if your business fails. This is why personal investment should be part of your funding mix but not your entire picture.
2. Get by with a little help from your friends (and family).
What are friends for? For many successful startup founders, the answer is “funding.” Funds can be raised from family and friends directly or through a crowdfunding web site, such as Indiegogo or Kickstarter. This approach worked for Scott Cook, co-founder of personal finance software company Intuit, who borrowed money from his parents to help start the financial software company when 25 professional investors declined to invest in it. Of course, in doing this, your family’s and friends’ money is at risk alongside yours, so it’s important for everyone to have realistic expectations from the start. Be sure to explain your business to potential investors, including outlining the risks involved.
The great thing about this funding option is that friends and family will want to see you succeed, and to some extent, they may be more forgiving of the inevitable bumps in the road that any entrepreneur can encounter. Once you have a finalized business plan and are ready to seek investors, set up a digital means for friends and family to support your venture, and offer perks for certain benchmarks of investment. And be sure to send a thank-you note to those who invest.
3. Reach out to entrepreneurial programs.
Find entrepreneurial programs, such as accelerators, incubators, or venture studios, that offers funding along with opportunities for mentorship and networking. In many cases, these programs should be able to give you a nice immediate funding boost while connecting you with more funding opportunities down the line. For example, startups that participated in GAN Accelerators raised an average of $547,000 over the 12 months following graduation, and the top two sources of funding over that time period were angel investors (47%) and venture capital (32%), according to the organization’s 2019 report.
In addition, the mentors and contacts you meet through an accelerator or incubator can help you determine the best funding mix for your startup as well as offer other practical advice. When seeking out an entrepreneurial program, look for one that specializes in your industry to get the most out of the experience. Examine the benefits the program offers and look into how the program’s alumni are doing a few years after participating. If startups that have graduated from the program are still in business and doing well, that’s a good sign that you will benefit from the program.
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This article is from Inc.com