- 4 Options for Funding Your Startup Without Losing Your Sanity - February 12, 2019
Most startup founders know that a great idea alone is worth nothing. Executing a great idea (and making it better) is the real job of an entrepreneur. It isn’t always pretty, as building a business takes long hours, late nights, elbow grease, and, of course, capital.
Obtaining the cash flow needed to start and grow a business can often become a full-time job in itself. It’s not an easy gig, either; most entrepreneurs struggle with the psychological impacts of the investment cycle, financial obligations of bank loans, and the time management challenge of securing funding while also building a business. Like most things, funding is never as simple as it seems.
Co-founding an entrepreneur-friendly fintech company, Clearbanc, along with many other previous companies has taught me a lot about e-commerce and entrepreneurial funding.
Here is my take on the funding options that exist in the market today, and how to approach these options while retaining your sanity.
Option #1: Traditional investments (equity for funding)
Across my three previous companies, I raised over $100 million in capital. My latest venture, Clearbanc, just secured $70 million in its last investment round.
While the press release headlines for a 7-figure funding round might seem impressive, getting there is always far from glamorous. For each business I’ve started, the investment cycle has taken hundreds of meetings, countless weeks and a consistent psychological toll. Even when funding is secured, every high-ticket investment comes with the potentially damaging loss of equity and control.
The investment cycle typically requires founders to take three to six months off from building their businesses, which will undoubtedly stunt its growth. Crunch the numbers to make sure this is time well spent; if you are running an e-commerce company that needs less money to ramp up, trading equity for startup capital may not be necessary.
However, if you are developing a product with high risk, high reward and major R&D costs (think new pharmaceutical drugs, computer chips or advanced algorithms), investors might be an important funding source.
The investment cycle can be psychologically challenging in two ways. The first is pretty obvious: being told that your idea is bad over and over in different ways is demoralizing. The lows of the investment cycle also come with extreme highs when an investor does sign on, which can lead to an addiction to the process of building “hype” around your business. Some entrepreneurs enjoy selling their ideas more than actually building on them, making their ventures all talk and no execution.
It is helpful to have a trusted person involved in the investment cycle, such as a business partner, who can help to keep you grounded and process-driven. My co-founder, Michele, and I have a debriefing routine after each meeting which helps us both to improve performance and keep feedback in perspective. It is also good practice to write down any feedback you get from investors each time. That way, if a point is repeated over and over by multiple naysayers, it may be worth taking a second look at this part of your business. If not, it might be better to stay the course and continue taking meetings.
Option #2: Bank loans and venture debt
If you’re considering funding your startup with a bank loan, reading the fine print is critical. Is it really a “business loan” if you have to put your home on the line? Most bank loans require personal liability, which means they are essentially personal loans earmarked for your business. With so much at stake, bank loans are often best suited for lower-risk businesses looking to fund a purchase that will drive predictable short-term growth, like ordering more inventory.
Reading the fine-print is similarly important when it comes to venture debt. This type of debt can be called in for things outside of a founder’s control, including economic factors or investor behavior, so a company dependent on this type of funding will have a shaky foundation. Also keep in mind that venture debt requires putting some equity on the line to access, so it should be considered more of an insurance policy than a viable long-term funding option. Whenever debt is involved with your business, it is important to look before you leap.
Option #3: Fintech funding options
Once a business is off the ground and can prove its merit, entrepreneurs may be able to access certain types of funding through fintech products. Fintech business models differ from traditional banks, so you will often find these digitally-driven options have less red tape and overhead. Take some time to educate yourself about how a company’s fees, repayment structure and qualification process works.
For example, Clearbanc qualifies funding offered to marketing e-commerce companies based solely on business data (like an investment round) and repayments are based on revenue instead of flat monthly rates. Research these innovative funding options so you can take advantage of them as you grow.
Option #4: Crowdfunding
Crowdfunding is an increasingly popular way to test-drive a business idea while also funding an initial launch. If you are developing a product that can generate some buzz, like Knix’s Evolution Bra or Baubax, this is fairly low-cost way to generate capital. It can also be a way of seeing how high demand is for your business idea. If your crowdfunding campaign falls flat, it may be a sign that you’ll struggle to sell the product in the later stages of your business.
Before launching a campaign, evaluate whether your business idea is unique enough to generate hype through crowdfunding platforms. Then, commit to doing the PR groundwork before and during your crowdfunding period, as simply launching a page will do little to generate attention without a campaign to support it. Creating a plan that includes press releases, media outreach and even some social media ads can give you the best shot at raising funds this way.
Don’t take funding decisions lightly
It is imperative that entrepreneurs who seek funding do so in a measured way. Set clear boundaries for how much equity you can give up, how much time you can dedicate to chasing capital, and what personal liability you are willing to take on for funds.
Do your research to find alternative funding options that may allow you to build a business without high-risk outside money. Most importantly, take steps to stay grounded and do not take feedback personally. Your ability to do so will make a big difference in how you grow your business.