There have never been so many options available for raising capital to start or expand a business.
There have never been so many options available for raising capital to start or expand a business. I recently had the opportunity to moderate a great webinar on Funding 101, featuring Brian Meece, CEO of RocketHub and Gil Beyda, Founder and Managing Partner at Gencast Ventures, where we covered the basics that every entrepreneur needs to know about funding. In this three-part series, I’ll recap much of the advice that Brian and Gil offered during the session. The entire webinar is also available for on-demand viewing – I encourage you to check out the full webinar for more details and some great stories. In this first part, we provide an overview of the different funding options that are out there.
The first thing you need to do before seeking funding is to create a legal entity for the business, whether that’s an LLC or a C Corp, for example. This will be the entity that issues shares, takes on investments, make contracts, etc. Once you are ready raise capital, there are lots of different types of funding options available. Here is an overview of the most common options:
Friends and Family Funding
Businesses often start because someone gets an idea and convinces family and friends to invest in it. There may be no product at this point and it’s difficult to get others outside your sphere of loved ones to get excited about it yet. Once you get through the friends-and-family round, you may be ready for the next level of funding.
Angel and VC Funding
Angels tend to be successful entrepreneurs themselves who want to give back and help the next generation of entrepreneurs. They bring industry or domain knowledge along with their investment. When you start approaching angel investors, make sure they are accredited, meaning they have a net worth of at least $1 million or they have an income of at least $200,000 for the last couple of years.
Venture capital firm offer institutional funds that are professionally managed and invest in companies they think have promise and they believe they can get a return from. They offer various rounds – seed, lettered (series A, B, C, etc.) – with the eventual goal of helping the company either get acquired or file an IPO.
When you get angel or VC funding, in exchange for the money, you create a debt or note which is a loan that either is paid back at a certain interest rate over a period of time or converts to part ownership in the company at some point. VCs can also invest at a particular price, so you’ll establish the price you think the company is worth, and in exchange for the investment, will issue them stock. Along with that may come a board seat or some other type of control mechanism so they can participate in the management of the company.
This is a very elastic model that comes in a few different flavors. First is donations, where money is collected online or via text for a specific cause or effort. Then there is the pre-sale, which enables you to test concepts in the market and get some capital before going into production. The equity model enables startups and young companies to put up offers and get investors. And, finally, there’s lending.
Investment-based crowdfunding is still relatively new. The JOBS Act, which was signed in 2012 and includes some regulations that are still being crafted, has four key components that are relevant to crowdfunding. Title II enables an accredited investor to invest online in startups. Title III opens up and limits the exposure for unaccredited investors – the Main Street investors. They won’t “lose their house” because the regulations cap limits what they can invest on an annual basis. And then there are planned regulations for intermediate-stage companies, which would enable them to undertake an offering to the public for both accredited and unaccredited investors. There are legal frameworks you need to work within – and associated legal fees – so you’ll want to get guidance from an attorney that’s familiar with this area.
When it comes to crowdfunding, if you have a “secret sauce,” you will want to work with your legal team to make sure you are protecting your intellectual property before you open your campaign up to the public.
Next: Tips for perfecting your pitch