Fund your business yourself with self-funding
Otherwise known as bootstrapping, self-funding lets you leverage your own financial resources to support your business. Self-funding can come in the form of turning to family and friends for capital, using your savings accounts, or even tapping into your 401(k).
With self-funding, you retain complete control over the business, but you also take on all the risk yourself. Be careful not to spend more than you can afford, and be especially careful if you choose to tap into retirement accounts early. You might face expensive fees or penalties, or damage your ability to retire on time — so you should check with your plan’s administrator and a personal financial advisor first.
Get venture capital from investors
Investors can give you funding to start your business in the form of venture capital investments. Venture capital is normally offered in exchange for an ownership share and active role in the company.
Venture capital differs from traditional financing in a number of important ways. Venture capital typically:
- Focuses high-growth companies
- Invests capital in return for equity, rather than debt (it’s not a loan)
- Takes higher risks in exchange for potential higher returns
- Has a longer investment horizon than traditional financing
Almost all venture capitalists will, at a minimum, want a seat on the board of directors. So be prepared to give up some portion of both control and ownership of your company in exchange for funding.How to get venture capital fundingThere’s no guaranteed way to get venture capital, but the process generally follows a standard order of basic steps.
- Find an investor
Look for individual investors — sometimes called “angel investors” — or venture capital firms. Be sure to do enough background research to know if the investor is reputable and has experience working with startup companies. - Share your business plan
The investor will review your business plan to make sure it meets their investing criteria. Most investment funds concentrate on an industry, geographic area, or stage of business development. - Go through due diligence review
The investors will look at your company’s management team, market, products and services, corporate governance documents, and financial statements. - Work out the terms
If they want to invest, the next step is to agree on a term sheet that describes the terms and conditions for the fund to make an investment. - Investment
Once you agree on a term sheet, you can get the investment! Once a venture fund has invested, it becomes actively involved in the company. Venture funds normally come in “rounds.” As the company meets milestones, further rounds of financing are made available, with adjustments in price as the company executes its plan.
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