Youâ€™ve got a big idea, but you need funds to make it a reality. Where do youÂ start?
As an entrepreneur, you need to consider what makes sense for the long-term success of your business. From seed funding to personal loans, there are plenty of options out thereâ€Šâ€”â€Šbut only you can determine what best suits yourÂ needs.
The list below outlines the pros and cons for five common ways that entrepreneurs raise money. Many startups use one, two, or a combination of all of these methods. And as with any financial decision, itâ€™s a good idea to seek professional advice before divingÂ in.
1. Take out a bridgeÂ loan
A bridge loan is just what it sounds likeâ€Šâ€”â€Šmoney that will help get your company started, break even, or make it to the next funding event. Investopedia defines it as a short-term loan, usually with high interest and backed by collateral such as realÂ estate.
Essentially, this is a short-term solution until you secure permanent financing, since you will need to pay back the loan (with interest). You may be able to obtain a bridge loan from a financial institution or an individual.
The appeal in bridge loans is that itâ€™s easier to negotiate the terms than to determine the value of a start-up and work out an equity stake, and the loans can often be arrangedÂ quickly.
Still, there are a few reasons to pause. A bridge loan is only a short-term solutionâ€Šâ€”â€Šyou need to be able to pay back your lender within a short time frame (for example, one year). Bridge loans are also an expensive option, as the interest rates and fees can be extremely high to compensate for the risk. You need to consider whether the short-term cash-flow will be enough to kick-start your businessâ€Šâ€”â€Šor risk going deeper into theÂ red.
2. Ask friends andÂ family
It may sound awkward, but realistically, many successful entrepreneurs got their start with contributions from friends and family. In fact, Yahoo Small Business reports that 38 percent of startup funding comes from family andÂ friends.
There are some clear advantages to raising money from your personal network. It frees you from having to persuade financial institutions and can give you a big morale boost by knowing that your loved ones believe inÂ you.
However, the friends-and-family round can be risky, too. Failure to communicate the terms of the agreement can result in lost friendships, damaged relationships or even lawsuits. You also need to be aware of the risk youâ€™re asking your loved ones to take on. For example, you could financially hurt a well-meaning family member if they lend more than they can afford and your business runs into difficulties.
Communication is key. Lay out your business plan, be upfront about the risks, and set clear boundaries and expectations. For example, is it a loan? An investment? Once you have agreed the terms, make sure you get everything inÂ writing.
3. Find a businessÂ partner
From Google to Microsoft, most successful businesses start out with more than one founder. It could be that you have the technical knowledge in your field or a stellar idea for a startup, but lack the skills to build and implement a solid business. Having a partner can be helpful because you have someone else to bounce ideas off, another network to draw on, and importantly, can benefit from a complementary skill-set.
When it comes to launching your business, a business partner can help you take your idea to the next level. If your business partner is more established in the industry, or has a history of launching companies, you are more likely to get noticed by potential funders.
Partnering with another person (or business) does mean giving up a degree of control. You should have a legal agreement to determine the level of ownership (or equity) in your business, and how that impacts decision-making.
Clearly, itâ€™s important to find the right match. Connect with past associates, ask for recommendations from supporters and peers, and donâ€™t be afraid to network. Explore sites such as FoundersNation, StartupWeekend, and CoFoundersLab.
4. Get into an incubator or accelerator program
Famous startup accelerators like Y Combinator and AngelPad have a good reputation in the tech world for a reason. Since 2005, Silicon Valley-based Y Combinator alone has launched successful companies such as Airbnb, Twitch andÂ Dropbox.
These fixed-term programs often give entrepreneurs a leg up by offering connections, mentorship, public pitch events and access to seed funding to help accelerate growth. The networking available differs depending on the program, but there is certainly an advantage to working with like-minded people and gaining access to potential supporters.
The downside, though, is that competition is extremely high, and even if you get in, you face stiff competition for access to venture capitalists. Programs are a heavy time investment (usually three to six months) and often require relocation of all founders. Furthermore, a recent TechCrunch article found that that less mature startups may not benefit from accelerator programs if the founders arenâ€™t ready to pitch or have difficulty leveraging theÂ network.
There are a number of different types of accelerator programs available. Itâ€™s worth exploring what, if any, would suit your business before applying.
5. Launch a Token Crowdsale!
A token crowdsale is a good way to attract supporters to your early-stage project. Token crowdsales are a form of crowdfunding, which is the fastest-growing funding source for startups.
The benefit of this method is that you can access a global network of potential contributors and peers, and generally donâ€™t have to give up equity in your business. This is particularly attractive for early-stage startups that may be gaining momentum.
If youâ€™re interested in a token crowdsale, you need to understand the risks and make sure you have a solid business plan and launch plan in place. This includes determining if your business is suited to a token crowdsale.
Once youâ€™re ready, consider simplifying your token launch. Rocket by Etherparty is a packaged solution that makes it simple to set up, launch, and track your token crowdsale, even if you donâ€™t have experience in crowdfunding.
Find out more by signing up for our newsletter at rocket.etherparty.com where you will receive exclusive giveaways, helpful guides and early access to productÂ updates.