Some people start with an idea and struggle to find resources to fund it. Others just look for ideas that can be pulled off by their current savings. The second way is preferable if you have not started a successful company before.
Get to breakeven on your current resources. Then you have much more options for funding your growth and expansion to other markets.
Customers
The best funding comes from customers. Ask them to pre-pay your future product or service. Be creative. Offer them more than just the first product. They can be co-creators. The product can be co-branded with their brand. They can get revenue share from your future sales. You can even give them a share of your company.
Savings
Everyone has savings. How much do you have? What can you sell? A car? Electronics? Garage sale for unused stuff? If you know in advance that you will start a company soon, start saving. Typically, founders start their company on savings around 5-10 average monthly salaries.
Friends and family
Most likely it’s parents, spouse or siblings. Jeff Bezos started Amazon with money from his parents. Be upfront that all these money can be lost. How much are they comfortable to lose? Put in written form the credit limit and other conditions. Is it an interest-free loan, loan with interest or do you sell a share of your company for initial investment?
Other income
You can search for business opportunities and pre-sell nonexistent products while still keeping your current job. Once market demand is validated it is better to have your full focus on a new company.
When resources are coming to the end and you have not reached breakeven yet, doing freelancing or other client work on a side can give you a bit of runway.
Co-founders
Look for co-founders who have more money than you do.Have a well-defined co-founder agreement in this case. Can you fire them later? Who controls the company? How do you split the ownership? What happens if you have a disagreement over something?
Having rich friends never hurts, so look for these relationships well before you begin working on your first company. Think, how can you be helpful for other people. Build relations with those who can fund you in the future.
If you do not know you rich co-founder very well, the partnership is risky. Offer to do a short-term joint project (1-2 weeks) before you start a company together.
Credit cards and personal loans
Personal loans can destroy your life. Only use them if there is a comfortable way to pay off the loan in the case of business failure. Would your family cover you? Do you have real estate or other assets to sell? Do you have a high value on job market and can pay off your debt from big corporate salary when your venture fails? Can you get some money back when liquidating your business?
If there is no easy way to pay off your personal loans in case of business failure, do not use personal loans.
Angel investment
Rich people who like you. Build these relationships well before you need the money. Be helpful. Give before you get.
Rich people who have the same idea. Ideas are common. Ask around. Who else is working on something similar?
Are you capable of doing great projects? Can you demonstrate it? Then just come to rich people and ask what ideas they would fund.
Strategic interest. Is there any big business that would benefit from your venture? Ask its owners for investment.
Profit-driven angel investment is unlikely. Here is a common scenario. This is your first serious venture. You have a great idea and economically attractive financial model.You meet some rich person for the first time and ask for money. They pass.
There are three reasons rich people give money for new projects: (1) you are friends with them for a long time, (2) you are already successful, (3) they have strong personal interest in getting the idea implemented.
After initial success
Business loans is a great way to expand from your initial success. They work best when you have a well known and predictable business model. Ideally, your business should have collaterals for the loan: owned real estate, product inventory, expensive and easy-to-resell equipment.
Venture capital and profit-driven angel investors are also getting once you have the basic business model working. They take more risks than business loans but consider only high-growth opportunities.
This article is a part of Earlydays, an open guide for first-time entrepreneurs.
Written by Yury Lifshits — yury@yury.name — @yurylifshits
