Swirl Connect

I am by no means an expert on this subject—just someone who has looked at many different types of funding and small business support—but I thought I’d pass on what we learned as we were going through this process with Swirl.

Rather than breaking everything down by category of funding, I’m going to break it down by stage, if for no other reason then because that’s how this information applies to us. Please also note that this article applies to start-ups, not small businesses. There are far fewer start-ups than small businesses, as start-ups are generally product-focused.

Just Getting Started

I’m considering this to encompass groups that have a vision for a product, identified some key players, identified some milestones, have begun work, but don’t yet have a prototype.

Savings

This one is obvious. Everyone should have some skin in the game. You are able to keep ownership and control 100 percent within your grasp, and having your savings on the line looks good to potential investors later in the funding process.

Bootstrapping

Bootstrapping is really not a source of funding, but is such a common practice in early stage start-ups that it deserves mention. When you hear someone talk about bootstrapping, it usually refers to any combination of techniques that can be used to get as much done as possible, for as little money as possible. It means making due with the bare essentials, fighting for every discount you can receive, printing on both sides of the paper, taking paid consulting gigs while your product is in development, or signing up an early customer or two.

Friends and Family

Many start-ups (somewhere around 80 percent, but I don’t recall the source for that) raise money from friends and family. The money is usually easy to find, but adding investment risk to any relationship is undesirable to many people. Another factor, though incredibly unlikely to ever affect you or me, is that your friends and family might not be considered “accredited investors” by the SEC. Should you achieve enormous success, and decide to issue an Initial Public Offering (IPO), the SEC might look at these funding sources as securities violations that will need to be rectified.

One option that you might find attractive is using a third-party intermediary to administer loans from friends and family. The intermediary can provide the loan documentation, structure a payment schedule, and provide statements to you and your lender. Loans are just as binding as bank loans, providing protection for your investors, but funding is easier to obtain at favorable rates, benefiting you. Circle Lending is a large, popular intermediary. 

Debt

You can always borrow money, of course. Many people use credit cards or personal loans to make ends meet. Home equity loans are another source of funds, though it’s generally recommended that you have at least 50 percent equity in your home before you even consider this option.

The U.S Small Business Administration (SBA) is a great resource. The SBA works with banks and lenders to promote financing for small businesses. They have several programs, including an Express program, LowDoc program, and a loan guaranty program, whereby they will guarantee a portion of a loan made from a traditional lending institution.

Commercial banks, S&L’s, non-bank lenders, credit unions, and so on are potential sources of loans. Unfortunately, at this stage of the game, they are very unlikely to lend money to your business. Instead, they might lend to you.

I’d recommend starting with the SBA, and then looking at any local business development or entrepreneurial councils that that you might have near you. They will probably be the best resources to put you in touch with suitable lenders.

Early Stage Start-up

In an early-stage start-up, you might have been operating for some time, and you generally have a product prototype prepared. Your product might be finished or unfinished, and you might or might not be ready for a big push to market. Yes, that does cover a lot of ground. For larger operations, early stage start-up is likely to start sooner, perhaps when a prototype is completed, and you’re beginning product development. For smaller operations, even late-stage operations, like rolling out a technical support desk or marketing your product might still be classified as early stage start-up funding due to small size of the investment being sought.

Angel Investors

Angels are individual, rich investors, and are referred to as angels because they generally have lower, and more flexible, potential payback and rate of return expectations. Another benefit of using angels is that they typically have a lot of experience funding early stage companies, so they might have a good amount of contacts or advice that can be helpful. Some angels invest as individuals, and others as part of a syndicate.

When you head down this road, you’re now talking about determining a valuation for your company, agreeing on participation terms, and giving up a certain amount of control of your operation.

Angels can be difficult to find, as most are found via personal introductions. A good way to meet angels is through business capital brokers, or through any local incubators. Business capital brokers might also be able to structure private placements.

Incubators

Incubators are so named because they traditionally house early stage companies, but there are quite a few organizations that offer incubation services without being traditional incubators.

Incubators typically provide you with a low-cost, temporary place of operations. Office space in our area, for example, runs from $400 to $800 per office, per month, and provides access to shared facilities and personnel like a break room, conference facilities, printing facilities, administrative assistants, telephone and Ethernet connections, etc. Many universities have incubation services where they also offer access to faculty, students, and campus facilities (think legal advice from the legal department, library access).

Incubators will also provide business and management counseling, assist with plan development, and generally point you in the right direction. A big benefit to using an incubator is the contacts that can be obtained there, especially to the local investment community, including angels and seed funding firms, as well as other occupants of the incubator.

Seed Funding

Seed funding is similar to angel investing in that it usually involves smaller amounts of capital at early stages of operation, but similar to venture capital funding in that it is normally done through an organization that invests and advises as their primary source of revenue.

Seed funding firms are generally easier to find than angels; perhaps the easiest way to find them is through local business or entrepreneurial councils. Within a few minutes, I was able to compile a list of about 15 seed capital firms located in our region of North Carolina. Search for words or phrases like technology development, small business development, incubators, entrepreneurial council, and so on; or try finding your local Chamber of Commerce or your city’s web site.

I’ve found seed funding firms that offer to invest anywhere from $500,000 to $5 million, though near the high-end of this range is where the distinction between seed funding and venture capital seems to blur.

Start-up

Venture Capital

Almost everyone has heard of venture capital, and venture funding is a very broad topic, so I’ll just cover it by saying that VC firms generally invest a lot more money, but expect a higher stake in the company, a higher rate of return, an exit strategy, and some investment protection (e.g. payback ahead of other investors or partners). Information on VC funding is plentiful on the web.

Conclusion

So there you have it. A capsulized version of the research we at Swirl did on our funding options. Hopefully it served as a basic introduction to help you get oriented in the see of options that’s available to your start-up.

Tags: ISV, Swirl, start-up, funding, seed capital, venture capital, small business

Filed under:
G&A by Shaun