Money Hunt: How 4 Smart Hustlers Found Money for Their StartupsRieva Lesonsky
Getting funding to start your business doesn’t mean gearing up to visit your local bank. In fact, a trip to the bank will likely get you nowhere—banks are notoriously tight-fisted when it comes to lending money to startups. Smart entrepreneurs know finding funding is all about the hustle. You have to be flexible, determined, creative and bold.
Where to Get Funding
There are two main (and traditional) types of financing available today, equity or debt financing—and neither is all that easy to come by. Equity financing involves ownership—and the idea is to keep as much of it as you can. We’ve all watched as Shark Tank contestants weigh the agonizing choice of taking money from one of the judges in exchange for giving up some percentage of ownership in their companies.
Your equity would come from personal savings, partner contributions and profits from the business. In a perfect world, 25 to 30 percent of a business’ capital needs should be funded by its owner/s. In addition to savings, you can get money from (depending on how risk averse you are) cashing in investments and/or insurance policies. You can ask your friends and family, either for a loan to increase you own equity holdings, or give them a percentage of the company in exchange for the money.
Outside investments could come from angel investors, often entrepreneurs themselves, who invest in promising companies or venture capitalists, who invest in companies that have potential for high growth and a rapid return on investment.
Debt financing is borrowed money that must be paid back, such as loans from banks and credit unions (including SBA loans), alternative lenders (from nonbanks) and credit cards. Businesses usually turn to alternative lenders when they can’t get a bank loan.
A newer method of getting financing that has caught on with startups (and the general public) is crowdfunding. There are a number of websites that help entrepreneurs develop campaigns to asking people to believe in them or their ideas and donate money to help fund the business (See Hyungsoo Kim’s story below). Popular crowdfunding sites for small businesses include Kickstarter and Indiegogo.
Raising money, whether for startup or expansion capital, is not for the feint of heart. Meet five successful entrepreneurs who had to be creative and hustle to find the financing they needed to create their successful businesses.
Crowdfunding has garnered a lot of buzz lately, but it’s not the panacea entrepreneurs hoped it would be. It helps if you’re asking the crowd to fund something that’s particularly fun, unique or innovative.
Hyungsoo Kim, Inventor and Founder
“Crowdfunding is a powerful tool for disruptive fashion products. Before I decided to do a Kickstarter campaign [which raised close to $600,000], I talked to many investors to try and raise money, but they all wanted certainty. The only competitive advantage you have in fashion is your product’s style, and it’s really hard to prove to potential investors that your brand and your product are going to be highly successful until you see people buying it.”[content field=”callout1″ format=”true” class=”callout”]
With so many sources of lending these days, why bootstrap? Because it enables you to more equity in your company, so if and when you decide to seek other investors or sell, your have more of a substantial stake, putting you in a position to get a bigger payoff.
Adam Robinson, Co-founder and CEO
“I’ve turned down around 20 people who have begged me to put money into Robly. I turned them all down because I thought my brother and I would have enough money to get us to cash-flow positive, and if we got to that point, our valuation would be 10 to 20 times anything we could have agreed upon at earlier stages. I also believe being bootstrapped gives you a type of discipline with expenses that entrepreneurs who take outside funding simply can’t have, by virtue of it being your own money.
Furthermore, being dependent on funding markets that have been historically very volatile is a very dangerous proposition if you’re worried about [building] a long-term, sustainable business rather than a quick exit. Although right now, raising a ton of dough at high valuations feels great because everything is charging forward, and that may continue for a long time.”
While it may seem mundane to ask family and friends for money (and the money raised could be somewhat limited), it’s smarter (and easier) if you can get people to rally around a cause.
Katie Hench, Co-founder
Skill Champ by Infiniteach
“To raise our start-up funding, we reached out to trusted family and friends who we knew had a personal connection to the autism community. At the time, we were only looking for their guidance and feedback on our idea, but we ended up also walking away with the financial support we needed to get Infiniteach off the ground. For me, this shows the powerful bond that connects the autism community; these individuals generously gave funding to advance autism services for children across the country and around the world.”
Not every successful company gets the funding its looking for. And while that can be devastating for some, smart hustlers know that being told “no” is not the end of the story.
Lynnae Schneller achieved what millions of entrepreneurs only dream about—she got to pitch her business to ABC’s Shark Tank investors. However, she didn’t get the money.
“Sometimes not getting a deal really is what’s best! Often people think a deal is the way to success. We are so thankful [we were] encouraged to continue on the path we were on. It was a great confirmation for the direction we are heading, [as] continuing to grow organically and keeping our equity really has been the best route for our business.”