Say you have a brilliant idea and you are looking to raise money to build a prototype and launch it on the market. Or maybe you’re already up and running but you need money to grow your venture to the next level. Do you know which door to knock on and what will the pros and cons be of using this particular path?
Each source is different in terms of ticket size, business stage, social and in-kind capital to cite a few. If you own a startup, you can already skip getting a loan from the bank. Unless of course, you have a collateral. This leaves you with literally six courses of action to raise money: friends/family, accelerators, crowdfunding, angel investors, family office, and venture capital firms.
1. Friends & Family
Who better to stand by you in achieving your dream than your family and friends? Typically, in the seed stage, you might consider a wealthy uncle, friend or neighbor, but make sure they know enough about the risk they are taking and that they only invest a fraction of their wealth. Startups have a low survival rate and you certainly don’t want to put your loved one or acquaintance out on the street. Advantages: Quick and easy access, non-binding terms. Drawbacks: Risk of relationship deterioration if the business is unprofitable; low amounts raised.
2. Incubators & Accelerators
For pre-seed stage ventures, accelerators can turn ideas into reality and take it to a whole new level. Accessing one of them can provide you with financial resources, mentors to refine your idea, talents, workspace, etc. Accelerators can also give you the leverage of their networking opportunities: suppliers, customers, partners and investors. Advantages: Training and entrepreneurial skills acquisition, mentorship, advertising, networking. Drawbacks: Hard to access the best accelerators, often demand an equity stake in return for low financing.
3. Crowdfunding Platforms
Crowdfunding is the process of soliciting funding from the general public who provide small amounts of money to fund a business in exchange for a reward or company stock. If the call to the crowd is successful, you can not only secure funding, but also obtain evidence of backing from potential customers and benefit from word-of-mouth promotion. Advantages: Equity transfer is not always mandatory, feedback on your business (poor ideas fail to get funding), advertising. Drawbacks: Exhibiting your idea can lead to stealing or copying, a failure creates bad publicity.
4. Angel Investors
An angel investor is generally a wealthy individual who professionally finances seed to early-stage businesses with his own money. The angel is likely to be faster and more personal than venture capital firms, which often get entangled in paperwork. Advantages: Angels appetite for risk, may bring in other investors, a simplified overall due diligence process. Drawbacks: Angels have high return expectations, may interfere with business operations.
5. Family Offices
Family offices are private wealth management consulting firms that invest assets on behalf of individuals with high networth. Familiy offices tend to invest regularly in the business throughout its life (evergreen capital) rather than all at once like other types of investors and generally do not have a near exit horizon. Moreover, Family offices prefer discreet transactions, unlike other types of investors. Advantages: Invests significant capital, provides connections, are more patient and less constraints compared to institutional investors. Drawbacks: Very selective and difficult to reach.