The most common place to find startup funding is either your savings account or your credit card (assuming it’s not already maxed out). The common scenario is for someone to take an early retirement and sink their life savings into a franchise and hope they see a profit in 5 years. 90% of the time, they don’t – they lose it all when then business fails, and have to go back to a job to rebuild in a hurry for a retirement that now may never come. However, by the time that happens, you’ve sold every non-essential item in the house and learned to live frugally, so you can rebuild…
So where else? Rich relative or friend? Only if they have disposable funds they don’t mind you losing if the business dies. And will you lose a friend if you can’t repay the loan? Can you ever attend another family gathering and face uncle Joe again?
Bank loan? No way. Usually banks won’t until after you’ve been profitable for a couple of years. Even the Small Business Administration loans are generally only loan guarantees if you can find a bank to loan to the business. And most won’t.
Angel investors? Not as a startup. If you’ve ever watched Shark Tank, you know they ask how many you’ve sold already. They want a proven product, the way banks do. And they’ll take part ownership in the business for the privilege of using their money.
Government grants? I read a book that says there are grants to start a business. True? Not really.
There are some grants you can get, if you’re the right demographic, like a veteran or displaced worker. You can get scientific research grants if you have specialized skills and a great idea. But those take time – I used to help decide who got them, and the process takes 18 months to get the first payment, and there are no guarantees you’ll get the second installment.
Crowdfunding? Few ever receive more than a few hundred dollars in outright donations, except for a special case that goes viral.
The best place to get startup funds is from … customers or clients. My friend Ray Edwards says “get clients first.” If you can resell a product or provide a service at a profit, it proves two things: that you have a product the market wants, and that you can run a business efficiently.
One twist is to do a crowdfunding where the ‘thank you’ gift is the item you’re going to sell. I helped fund the production of a movie that way. I donated up front, and after the movie was finished I got a couple of copies before it was released to the general public. I’ve also bought a neck pillow and a construction tool that way. Others have funded their book project with crowdfunding.
This is the idea behind The Lean Startup (by Eric Reis). Build a ‘minimum viable product’ and see if someone will buy it. Then add features and sell that. Redesign and make it more durable, add benefits and bonuses.
If you need funding after that to scale up the business, you have a better chance at investors and loans. Because you have a track record.
In summary, the 10 ways are
10. Credit debt
9. Life savings
8. Family and friends
7. Sell your unwanted stuff
5. Angel Investors
4. Government Grants
3. Crowdfunding for donations
2. Crowdfunding to fund the initial batch of products