Before we teach you how to raise capital, you first have to figure out what type of capital you’re going to pursue. Understanding all the nuances of the different capital sources can get confusing, and most Founders don’t actually know why one source of capital is more appropriate than the other.
We’re about to change all that for you. You’re about to learn everything there is to know about the different forms of capital. No, it’s not as exciting as watching a Marvel movie, but it pays better.
Startups typically raise money in 3 ways – Bootstrapping, Debt, and Equity. There are a few more variants but there’s a 90% chance that if you raise money, this is how you’re going to do it.
Using your own capital (credit cards, customer’s purchases, eating Ramen noodles). We’re going to lay out why this is always “Plan A” and every possible method of finding capital in your couch cushions.
Investors give you their money in exchange for a piece of your company (angel investors, venture capitalists). We’ll look at both regular equity investments and “convertible notes” as the most common ways to structure an investment.
You borrow money (banks, some investors, specialty finance companies). There are many different debt options so we’ll compare each of them so you can understand which applies to your situation.
The rest of this section is dedicated toward outlining how each funding type works, where it fits in your plan, and what to expect if you go that route.
Before you get too fixated on one source of funding, remember that funding for a startup is typically a combination of every available capital source. Almost every startup funding strategy is a mix of bootstrapping, debt and equity at the appropriate levels during the appropriate times.
Seasoned Founders do a great job of understanding the pros and cons of each funding type and when they can use each to its maximum effect. That’s a big part of what we want to illustrate here.
Contrary to what many believe, most businesses don't get started by way of a big investment from some deep-pocketed investor. Most businesses get started by an entrepreneur using their own means to launch the company, which is called “bootstrapping”. It’s the default position everyone starts at.
Bootstrapping involves all sorts of capital - friends and family, your personal savings, crowdfunding, and of course the ever popular "sweat equity" (getting people to work for stock in your company).
You can expect to have to invest some of your own time and capital into the business before someone else will start putting outside capital into your company. If you don’t have a lot of cash to put into the business, you’d be expected to at least invest a lot of time doing market research, talking to potential customers, and putting your plans in place to make the business successful. Simply having a business idea isn’t enough.
Once the business has been established, even if that’s as simple as incorporating and putting together the business plan, the search for capital may begin. However, the less you’ve done to move the business forward, the less likely you are to find outside capital.
Our experience in working with hundreds of thousands of businesses has suggested that you want to push the business as far as you possibly can without capital before you seriously begin looking for capital partners.
First off, let's not think about Bootstrap Capital in terms of "if an investor doesn't give me money, I guess I'll try to figure out how to do it myself." That's a recipe for failure. Bootstrapping is your Plan A. It's not an alternative to finding funding. You’re going to bootstrap no matter what until one day you aren’t.
The most realistic path to growing your company, even if it does eventually take outside funding, is to exploit every possible method of Bootstrap Capital you can get your hands on.
99% of businesses are not going to attract angel investors and venture capitalists. That doesn't mean 99% of entrepreneurs just pack up and go home. It means that they make intelligent use of Bootstrap Capital. They stay lean. They stay scrappy. They figure it out. That's how businesses actually get started.
From the moment you have an idea up until the point where your company starts building some traction (finding new customers, getting a product launched); Bootstrap Capital is what's going to pay the bills.
Using your own methods of funding has two huge benefits:
. The further you make it by bootstrapping the less reliant you are on investors. Sure, it's intimidating to start a business now when all you see are costs and having a big outside check sounds real nice, but eventually the business will start generating some revenue, and eventually it'll start paying for itself. Usually what you need is time to get there, and Bootstrap Capital is what typically fills in the gaps.
. Bootstrapping forces you to be very capital efficient, because, well, you have no choice! That is exactly what investors want to see. They want to see a Founder that watches every penny of their money and can show that they can make a lot out of a little. A Founder with a strong bootstrapping story is very appealing to investors for just this reason. They think “If they could get that far without money, think about what they could do with my money!”
Therefore, whether you plan on raising money or not, your default position will be not only using a some of your own capital and resources, but demonstrating that you’re crazy efficient with how you use those resources.