10/20/11 | Uncategorized

Five Sources of Funding for Startups (VCs Aren't One of Them)

By Anisha Sekar (Director of Marketing, NerdWallet)

Receiving funding from a venture capitalist has it’s perks: not only do you suddenly have a substantial cushion, but you also get the VC’ss support, experience, advice, likely extensive contact list, and sometimes even space and physical capital. But taking venture funding has its downsides.

The immediate (and much-discussed) drawback is that accepting VC funding means ceding both equity and control over your company. Now, you’re responsible to someone whose drive for profit might not be aligned with your personal goals, and your share of the profits is substantially diluted. It’s not unheard of for a VC to push more funding on a startup than is necessary, simply to get more equity.

A less obvious, but perhaps more detrimental, effect can be losing the lean-and-mean spirit that keeps you resourceful and canny.

If you’re bootstrapping, you’ve got your retirement or your kids’ college fund on the line, so you’ll be smart about how you spend and you’ll be more committed to succeeding. If you’re always just a little short of cash, you don’t have the option of paying money to gloss over a problem. You’re constantly seeking ways to do more with fewer resources, a mindset conducive to innovation.

That said, not everyone can fund a startup entirely with their own or their friends’ and family’s money. If you’ve decided you’re better off without venture funding, here are some solid alternatives.

Alternative #1 — Small business loans

Approval rates for small business loans from large, for-profit banks dipped sharply since 2008, and now hover in the single digits. However, approval rates from credit unions and community lenders topped 40%. Consider your local credit union or small bank, or go through the Small Business Administration. Women and minorities, in particular, can take advantage of specialized low-
interest loans. Loans have their drawbacks, however: they often come in fixed amounts, so you may have to pay interest on funds you don’t need; and if your startup goes bankrupt, you might still be liable for your debts.

Alternative #2 — Government Grants

Though the federal government only doles out grants to nonprofit and not-for-profit organizations, you can still access grant money by focusing on your startup’s philanthropic value. If you partner with a university and offer an innovative solution to a societal problem, the university can apply for a grant on behalf of your project. By teaming up with a professor or researcher, you may be able to access university and government funds.

Alternative #3 — Forward-looking Clients

If you’ve already got a customer lined up, they may be willing to fund product development in exchange for a more tailored product or exclusive access. Even better: if you’ve got clients who are willing to pay for your product, you’re one step closer to proving there’s a market.

Alternative #4 — Credit Cards

Google was financed with credit cards: Larry and Sergey maxed out their credit lines to buy computers. Small business credit cards can provide greater flexibility and better terms than other sources of funding. You control entirely how much you borrow, so you don’t have to turn over 75% of the company for $200k when you only need $50k. These tend to have higher credit limits and lower interest rates than personal ones: the best business credit cards come with single-digit APRs or six-digit credit limits.

On the other hand, not every company is Google. Using a credit card comes with significant risk, not least that a higher credit limit means that you might go deeper into debt. And what’s more, business cards are not covered by the Credit CARD Act of 2009, which protects personal cards from unannounced and sustained interest rate hikes, among other tactics. Finally, though the credit card may belong to the business, if your name is on the card, your credit score reflects the account’s performance. If your co-founder misses a payment on the account, your FICO score will also take the seven-year hit. Credit card financing is not necessarily a terrible option, but it should be used with extreme caution.

Source #5 — Crowdfunding

crowdfunding platforms can provide the initial investment to get your startup moving. Many platforms, like 33needs, serve socially-oriented businesses, but others are more general. Perhaps the most famous is Kickstarter, which funded the open-source social network Diaspora. Be careful, though: the terms and conditions might not be favorable. Kickstarter only pays out if you can raise the full amount, and doesn’t let you limit how much you raise; tech-oriented MicroVentures takes a 10% cut of what you raise.

This post originally appeared on Nerd Wallet’s blog.

About the guest blogger: Anisha Sekar is the Director of Marketing at NerdWallet, a credit card comparison and personal finance website that offers unbiased advice on financial products. NerdWallet leverages award-winning technology to recommend the best credit cards and deposit rates based on the user’s spending habits, credit score, location, tax bracket and more. Anisha studied applied mathematics and economics at Brown University, and enjoys running and rock climbing.



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