funding sources (entrepreneurial financing)
There are a broad range of funding sources available to entrepreneurs. Most entrepreneurs think that they will need to get a bank loan or an equity investment from a friend or family member, but below we will discuss a wider array of options available to entrepreneurs. In many ways, the best path is to self-fund (bootstrap your business). Doing so will allow you to maintain as much equity as possible. Even if you need to raise money, bootstrapping for as long as possible (without diminishing your prospects of success) will increase the value of your company when you do raise money, again allowing you to maintain more equity (less dilution). Some entrepreneurs use funding as a destructive crutch that slows down their need and desire to figure out how to make money.
Once you have found a business model that works, raising money to scale that model can often be a good idea. You might raise money to beat competitors to market, to capture market share, or to launch new growth strategies.
comparison of funding sources
The table below compares various funding sources based on several important factors. These factors can help you to understand the benefits and trade-offs of the types of funding.
In general, funding sources progress from simple to complex. Simple funding sources do not offer as much funding (or require self-funding), are easy to find and access, have relatively lower expectations in terms of returns, and exercise little control over your company. More complex funding sources can write very large checks, are more difficult to find and access, have high expectations for returns, and exercise a great deal of control over your company. Middle of the road sources exist and often have a less strict focus on monetary returns looking instead to create some "ecosystem" benefits like job creation in a regional economy.
The funding source that is best for you will depend upon:
- Your capacity for self-funding
- Your ability to attract external funding sources and convince them to invest
- Your willingness to share the potential financial rewards of your company
- Your willingness to give up some or all control of your company
|
Funding Source |
Typical Amount of Funding |
Availability |
Interest / Principal |
Equity |
Control |
Validation / Other |
|
$10K-$1M+ |
Readily available |
No |
No impact on equity |
Entrepreneur can maintain all or most control |
|
|
|
$10-40K |
Readily available |
High rates of interest, need to repay principal |
No impact on equity |
Entrepreneur can maintain all or most control |
Failure to repay can affect credit score |
|
|
$20K-$100K |
Moderately available |
May require interest, principal repayment |
May require giving up equity |
Entrepreneur generally maintain all or most control |
Failure to repay can affect important relationships |
|
|
$10-60K |
Winning is competitive |
No |
Generally, no impact on equity |
Entrepreneur can maintain all or most control |
|
|
|
$10K-$500K+ |
Winning is competitive and depends on your business |
No |
No impact on equity |
Entrepreneur can maintain all or most control |
|
|
|
Little or no cash, but provide office space and assistance |
Moderate availability in large tech metros |
No |
Incubator can take up to 10% equity |
Entrepreneur can maintain ultimate control but may need to meet some requirements to receive free services |
|
|
|
Little or no cash, but provide incorporation and support |
Readily available at universities |
No |
Universities usually take equity (up to 30%+) or royalties on future revenue |
|
|
|
|
Depends on amount of equity |
Readily available |
Yes, moderate rates of interest |
No impact on equity |
|
|
|
|
Personal credit and business financials, generally not available for startups |
Very difficult for early-stage companies with limited financial history |
Yes, moderate rates of interest |
No impact on equity |
Banks loans often come with covenants that restrict some actions |
|
|
|
Up to $2M |
Requires good personal credit, good business plan, you must have invested 25-50% of the loan value in the business, provide collateral etc. |
Yes, up to 2.25-2.75 percentage points above the prime rate |
No impact on equity |
These loans sometimes have covenants that restrict some actions |
Often requires a personal guarantee |
|
|
Generally around $25K to $1M+ (as a group) |
Angels are very selective in what they invest in |
No |
Yes, Angels will generally take a 10-30% stake |
Angels will generally take preferred stock with certain protective rights and a board seat |
|
|
|
Generally around $25K to $1M+ |
Seed Funds are very selective in what they invest in |
No |
Yes, Seed Funds will generally take a 10-30% stake |
Seed Funds take preferred stock with certain protective rights and a board seat |
|
|
|
Generally around $1M-$10M+ |
VCs are even more selective in what they invest n |
No |
VCs will generally take a 10-30% stake |
VCs take preferred stock with certain protective rights and a board seat |
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Financing (Entreprenuerial)