Effective Options for Raising Capital for Your Startup

Business.com / Funding / Last Modified: February 22, 2017

There’s never been a better time to be a savvy entrepreneur. Here is the most effective way to raise captial for your startup.

There’s never been a better time to be a savvy entrepreneur. You have so many incredibly powerful and sophisticated tools at your disposal and overall global connectivity has never been higher. With that being said, neither you nor any entrepreneur can be successful without first raising enough capital to turn your business from an idea into reality.

Unless you happen to be one of the few entrepreneurs that already has enough cash to self-sufficiently support a new startup, you’re going to need to find a way to amass some capital. In most cases, there are six preferred options.

6 Ways to Raise Capital for Your Startup

Family and friends. When seeking to secure funding, most entrepreneurs start with their friends and family. If you have good relationships, this is a good idea, as most of your loved ones will want to see you succeed. However, this can be rather problematic if you aren’t careful. Money has a way of straining relationships and can force you to either compromise your business or cut ties with people you love. When borrowing money from people you know, make sure they are financially capable of giving you the money you need and that the terms are clearly laid out on paper. 

Bank financing. After going to friends and family, the bank is the second most popular destination. Many local banks are happy to grant small business loans, as long as you come with sufficient information and a detailed business plan. However, you may be asked to use some other form of equity (such as your home) to get your loan approved. Just make sure you understand what you’re risking when signing a small business loan from your bank.

Angel investing. The popular show Shark Tank is an excellent example of angel investing (though a little dressed up by Hollywood). Angel investors are successful entrepreneur who have enough cash in their own portfolio to invest in other businesses. The major benefit here is that along with the cash, angel investors offer ongoing guidance and advice.

Venture capital.  These are groups of savvy investors who pool their money together to invest in early stage businesses with promising futures. In return for an investment, they typically ask for equity and/or debt financing.

Related Article: Getting By Without a Business Loan

Equity crowdfunding. One of the newest modes for raising startup capital is what’s known as crowdfunding. There are typically two types of crowdfunding, and we’ll discuss the equity model first. Equity crowdfunding is when you use a website to raise capital from anyone who’s interested in your startup. In return, you offer a percentage of capital for each dollar invested. In most cases, you set a minimum amount you’re willing to accept and the majority of investors are business men, women, and other professionals looking to take a chance and diversify their portfolios.

Rewards-based crowdfunding. This form of crowdfunding is pretty much identical to equity-based crowdfunding, only instead of offering equity in return for an investment, you offer a tangible reward. This could be a sample product, tour of the facility, or a complimentary membership. Rewards-based funding tends to attract much smaller investments and targets average people who are more interested in the product or service than a long-term return.

Now that’s not to say there aren’t any other options. You can always take a second mortgage, add a business partner, or win the lottery, but these are the six most practical and common options.

Helpful Tips for Raising Money through Crowdfunding

If crowdfunding sounds like something you’d like to try, it’s critical that you start by developing a strategy. Here are a few tips to get you started in the right direction:

Related Article: Hustling Tactics That Will Have You Crowdfunding like a Pimp

Start with a pre-raise. When starting a crowdfunding campaign, it’s ideal if you can pre-raise a percentage of your goal prior to the actual launch. Studies show that entrepreneurs who are able to pre-raise between 5 and 35 percent experience a success rate of between 80 and 100 percent.

Sell yourself. You’ll frequently hear angel investors say they invest in people, not ideas. That’s because people make good startups, not the actual product or service. When attempting to crowdfund startup capital, sell yourself as the primary asset. Many experts suggest sharing a personal story as a way to connect.

Invest in marketing. You should use the viral nature of the internet to your advantage. Instead of sticking to your limited crowdfunding campaign on a hosted site, try sharing links on social media and through other blogs. The more traffic you can generate, the better chance you’ll have of reaching your goal and funding your startup.

Don’t Give Up

Raising capital can be stressful, time-consuming, and even gut wrenching at times; however, don’t give up on your dream. All it takes is one believer and your business can get the capital it needs to succeed. While traditional methods for raising startup money can and do work, consider giving crowdfunding a chance in 2015. It’s a refreshing change of pace and could pay dividends.

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