Many people dream of starting their own company. It is sexy, hip, fun and exciting. Unfortunately,there is a downside: tremendous risk. No one wants to assume risk, and much less to actually lose the risked assets. It is never easy to fund your company, because whoever provides the funds, assumes risk. In this article I will go over 10 ways you can fund your startup through investment, the company’s own revenues, and other ways, to hopefully make it more clear which ways to start the company make sense for you.
1) Your Own Savings
[login]Imagine yourself funding a company which has a high chance of failure from your own savings. This sounds scary, right? It is very scary indeed. This is the most obvious choice and in many cases least preferred by entrepreneurs because it forces them to undertake the most risk and watch their bank accounts decline on a monthly basis, or even worse, see their debt level rise.
Yet if you have a reasonably quick path to revenue, this might be the best way to fund your company. It is the most risky and the most rewarding way to fund your company. If you get to break-even revenue point and do not take money from any other sources, you not only retain full ownership of the company, but you also retain maximum flexibility in any choice you want to make for the company moving forward.
Do not forget though, this funding method isn’t for the faint of heart.
2) Friends and Family
Taking money from friends and family to fund your company is a common idea in start-up folklore and is commonly brought up, so I thought I’d address this way to fund your company. It is my least favorite way to fund your company.
First, you take a chance on your relationship with your friends and family. Second, since most start-up companies fail, you will probably lose their money. To put things most frankly, you will probably displace the risk from yourself and place it on your friends or family while have their investment pay your rent while you lose their money.
This does not seem like an ethical thing to do and while it does take some of the financial risk of your shoulders, you risk losing much more in the long term.
3) Angel Investors
This is one of the more controversial ways to get your company funded (or not). When it comes to pursuing angel investment, both, the pros and the cons are quite strong and convincing.
The pros are that you get to give up only a small part of the company for potentially great connections with people who will champion your company and help you get further rounds of funding and give you great advice along the way. The angel investors tend to have more access to PR, which will also help you along. The money is a pro in itself as well.
The cons are that you give up some control of your company, and you have to go out and spend time and effort seeking this investment. The time and money you spend seeking the investment are time and money that are not being put into your company, and if you do not secure investment, or the process of raising an angel round takes too long, the lack of diverted resources may be too damaging to your company.
Also, not every company is “invest-able” so make sure you are investment-worthy to even consider angel funding as a possibility. To be a type of company which can get investment, you have to be going after a potentially big market and have a technology which can potentially be competitive in the big market you are going after. Your management team must also be top notch.
4) Funding From Your Own Revenue: Ad Revenue
One of the best ways to fund your company is through its own revenue. Since at the time of the writing of this article (Fall of 2010) global advertisement spending is rising, it is a good time to be a publisher. Let me outline the strategy to fund your company perations through ads.
Ad revenue is measured in CPM, which tracks how much money your ads make you per 1,000 page views (note – page views and not unique visitors). CPMs tend to range between $0.30 and$40.00 so the range is gigantic if you look at percentages. If your business is focused on a niche, you can generally expect at least a $5.00 CPM and if your business does not have a particular niche focus, then your CPM will probably be very low since the advertisers are not sure who they are advertising to.
If you are able to get to the reasonable $5.00 CPM, in order for your business to generate $5,000/month you will need 1,000,000 page views a month. That is obviously very difficult. The only silver linings are that you can get more page views per visitor by building a better productand that you can work on ad placement to increase your CPM. You can also supplement this with other revenue models, some of which I will outline in this article.
5) Revenue From Selling Things
Some people think that generating revenue from selling things can fund their start-up. Surprisingly, the math for that type of funding can be even worse than making money through advertisement. After all the possible discounts and affiliate commissions, the return is not a wholelot more than the $5.00CPM that may be earned from advertising. A good supplemental strategy to serving ads or selling things, is to do both of them at the same time.
A person who may not buy anything, may click an ad, and the person who may not be looking at ads might actually purchase a product they are looking for. When possible, converging these two revenue models may help increase revenue per visitor.
6) Working Part Time
One great way to fund your startup is through having a part-time job. It helps you avoid giving up control of your company which would happen if you took investment, and does not create a mess out of your monetization strategies which might otherwise force you to take shorter-term approaches and poorly affect your decisions. Plus, having a part-time job would allow you plenty of time to work on your own company.
7) Startup Incubators
There are many incubators available to start-up companies. The most popular is the Y-Combinator started by Paul Graham. If you get accepted to any of these incubators, your advantages over almost any other company become unreal. First, they provide a little cash. Theirinvestments average from 10k-25k. Second they provide facilities like office space and sometimes even housing. On top of that, they provide mentorship and help in raising further rounds of funding. Further on top of that, they give access to plenty of PR opportunities because many of the technology publications love to write about incubator companies.
The down side for such incubators is that they are very difficult to get into. Your idea and possibly the founding team must be in the 90th percentile in terms of quality and potential. In addition, the incubators often require the founders to move to the city of the incubator. So you may be forced to uproot your life in a big way if you do get in.
The application process can take some time, but if you get accepted, it should have positive effects on your business and overall career moving forward.
Does this still work? No, it does not work by itself unless you do a couple of things very right like be extraordinarily giving and helpful to your audience, or undercharge for your product to the point of making donations seem plausible.
If you do great things and undercharge for it, you may get a small trickle of donations if you ask for them. They may help you if you are struggling to earn revenue since I outlined just how difficult it is to make money simply being an ad publisher.
9) Increasing Margins Through Product
One great way to fund your company is to partner intelligently to up-sell larger things. As an example, lets imagine that our site makes money only through ad sales. To remind you, we calculated that for most sites, it would take over a million monthly page views to make any significant revenue from it. Now lets imagine as an example that our site is related to nutrition. On average with the ad-revenue model, we make pennies per visitor, but if we partnered with a nutritionist we could increase that. If we suggested that the visitors to our health site mightbenefit from talking with a nutritionist, and recommend one, then we can do a revenue-sharing deal with that nutritionist. If we figured out how to track whether visitors from our site became their customers, we could make more money since a nutritionist can make up to thousands of dollars from a long-term customer.
In this scenario, the nutritionist is happy because their practice and client base would grow. And the extra commission would help fund our company and fuel growth without needing to reach the astronomical numbers of visitors if our source of funding was from ads-only.
10) Increasing Margins Through Team Structure
I am no economist, but a very good supplement to making money is not spending more than you have to. In order to make the funding of your start-up easier, you can decrease the amount of capital that you need. Try to work harder and learn more skills which will allow you tohire less and achieve more. A web start-up is a mixture of rocket science and hard work, but the hard work outweighs the rocket science by a very large margin. If you work your tail off, you will need less money because you will be accomplishing more with less.
Bonus Idea: Industry Contests
In the web industry there are many annual contests with cash prizes worth thousands of dollars. You can enter them and hope to win. Just like anything, entering these contests takes up time which can be devoted to the actual startup, so be careful. Additionally, many of these contestshave manipulated voting through the inside or by people who figure out how to game the voting system. Few are 100% fairly run since when money is on the table, people try to get ahead however they can. All that said, winning an extra 10 or 50k can make a tremendous difference.