February 11, 2015
Angel investor Jeff Carter knows a thing or two about turning concepts into profit. He is the co-founder of Hyde Park Angels, one of the most active angel groups in the United States. Currently, he is raising a small VC fund, West Loop Ventures for startups in Chicago.
He recently wrote a blog post about various sources startups can use to raise money. He listed 13 sources, from friends to crowdsourcing, and shared their advantages and disadvantages for startups. Here are his important points:
1. Friends and Family
Advantages: “They love you, so sometimes raising the money is easier.”
Disadvantages: “Because it’s family, often times they think they are entitled to meddle or fix problems.”
2. Government Grants
Various governments, including the US, have programs to give money to businesses to encourage entrepreneurship.
Advantages: “It’s ‘free’ money.”
Disadvantages: “The amount of money that the company can raise [through these programs] is usually not enough to get it to sustainability.”
3. Bank Loans
Advantages: “Capital is non-dilutive to the equity cap table.”
Disadvantages: “Banks almost never lend to a startup, even if they say they are targeting startups. Banks don’t like risk, and will only lend if you have proven cash flow, and have been in business for awhile.”
4. Small Business Innovation Research (SBIR) Grants
SBIR are intended to help certain small businesses conduct research and development (R&D). Funding takes the form of contracts or grants.
Disadvantages: Very long process.
5. College Entrepreneurship Programs
Advantages: “Often times it comes with membership, and a place to work.”
Disadvantages: You have to be in college.
Advantages: Credibility. Mentorship. Focus. Access to the ability to raise capital. Sometimes a space to work with other startups that create support and learning
Disadvantages: “Sometimes the time in the incubator doesn’t bring value. Check sizes from incubator not very large. Mentors don’t follow up with company post accelerator.”
7. Working Spaces
Advantagess: “Company gets an office or space to build from.”
Disadvantages: “Often, equity is exchanged for the space and mentorship.”
8. Individual Angels
Advantages: “Often times write larger checks.”
Disadvantages: “Can take a lot of time to make a decision, or won’t make a decision.”
9. Formal Angel Groups
Advantages: “The angel diligence process should be good for the company and get it ready for VC funding.”
Disadvantage: “Can be bureaucratic.”
Advantages: “Can access a huge group of investors online, and in one spot.”
Disadvantages: “Messy cap table.”
11. Private Venture Capital Funds
Advantages: “They have funding networks, and can organize future rounds-and help with exits.”
Disadvantages: “Can dominate board rooms and worry about their value rather than shareholder value even though they have a fiduciary responsibility to company first.”
12. Corporate Venture Capital
Advantages: “Expertise, access to customers, access to mentors.”
Disadvantages: “VC might integrate company before it reaches full potential valuation, cutting payday for founders.”
13. Company cash flow
Advantages: “Bootstrapping forces company to stay lean.”
Disadvantages: “Firm might not scale fast and lose out on opportunities.”
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