Money is one of the main obsessions of founders. It can be overwhelming for founders and chasing money can become a trap that prevents you from working on other aspects of the business.
Understanding the types of funding available to founders, and the benefits and limitations of each, is something I wish I had understood more completely when I started my business.
Scroll down the page to review the pros and cons of each of the funding options outlined below.
Friends & Family
Angel Investors
Venture Capital
Strategic Investors
Grants
Tax Credits
Government Loans
Business Loans
Personal Loans & Credit Cards
Revenue
Friends & Family
Pros
Cons
Known by some as “love money”. Investors in this category are investing in the founder(s), more than the business. The decision is made less on the business plan or potential results, and more on the investor’s belief in the person they are funding. The qualification threshold can be lower, and these investors are typically hands off the business.
Not all founders have access to people with resources to invest in their business. Typically, love money arrives in small amounts from people who will have a low risk tolerance. Because many investors in this category are inexperienced, there’s a risk of damaging important relationships if the business fails.
Angel Investors
Pros
Cons
Angels provide financing and business experience to founders. So not only do you get investment, typically, you get access to experienced advisors. Many angels have specific industries they’re interested in, or a geographic focus.
Many angels want a big stake in the business in exchange for their early investment. They also may want to protect themselves from dilution in future funding rounds by requiring the business to issue preferential shares. Angels become another partner so make certain you and your angel share the same vision for the business, to avoid conflict.
Venture Capital
Pros
Cons
Venture Capital firms (VCs) are professionally managed funds that exist to make money. There are some early stage funds, however, most VCs are interested in a project that’s been de-risked. Founders can get larger investments from these organizations, but you need to be aware of the returns that the VC is expecting from their investment.
This is a very competitive field. Founders need to be prepared. They’re investing in the founder and the idea, but they also want to see the business case. VCs are moved by team and the addressable market. The diligence process can be long and demanding. Funding rounds can involve a number of different investors, all of which want something different. VCs are going to want to be directive in your business and will hold you to established milestones.
Strategic Investors
Pros
Cons
It may be possible to get a prospective client, or established business that complements yours to invest in technology. If you have industry experience in the field your business is launching, this is a really strong option.
The risk is that they may steal your idea. Or invest and then keep your project on hold while they work through other priorities.
Grants
Pros
Cons
Free money! (As much as such a thing exists.) Many of these programs are designed to support individuals who may not have access to other financing sources. Some require the business to contribute a certain percentage of the project costs so grands can help extend the money you have. Plus there’s no equity erosion.
Complex application processes. Selection of projects can feel arbitrary. May require participation in programs offered by government bureaucrats with no private sector experience. Onerous reporting. Founders might have to cash flow the projects on the front end.
Tax Credits
Pros
Cons
It can feels like “free money” without strings. Founders are able to recover funds that have been spent on salaries or consulting fees and apply the refund to other priorities that are relevant at the time.
Depending on the program, these may need to be approved in advance, although some programs can be applied to retroactively. Usually tax credits are limited to very specific activities within the business. Many contain onerous reporting requirements.
Government Loans
Pros
Cons
The options available will vary by market. If you have something to contribute, governments can help extend your wallet, with reasonable terms and you don’t have to give up any equity. These kinds of loans are typically offered through economic development agencies.
Many require personal guarantees from the founders, and require investors who have contributed cash as loans, to sign subordination agreements, assuring that the government is the first to get paid in the event of liquidation. Government has low risk tolerance.
Business Loans
Pros
Cons
Banks can offer competitive rates for qualifying businesses.
Very difficult to secure, unless you have recurring revenue. Banks are not in the business of financing startups.
Personal Loans & Credit Cards
Pros
Cons
For many founders this is most accessible source of funding at the early stage. It is non-dilutive too.
High risk to the founder, in a situation where you’re already taking risks. Depending your personal credit history, loans could have very . Credit cards are also high interest.
Revenue
Pros
Cons
Generating revenue is the best possible option, if you can make it work. It shows government and investors that there’s a market for your product. And revenue is non-dilutive, i.e. you don’t have to give up equity.
Being able to make money from your business assumes that you have something ready to sell that you get to market and support your clients.
Upstarts 