Part 3: Funding

A topic top of mind for any starving entrepreneur is the funding of the venture.

In this post, I will try to cover some of the more straightforward options.

1. Self-funding: If you are employed, or have any sort of income, some of that can be used to fund your idea. Depending on your circumstance, this may mean dialing back some elements of the "lifestyle" or re-examining your income and expenses to see what you can really afford.

Pros: Ease
Cons: Often inadequate

2. Bootstrapping: This works best for short term, high pressure, low risk usage of funding. While risk in a young venture can be difficult to grasp, suffice it to say that massing credit card debt or high interest small business loans (angel funding) should be held until they are truly needed.

Pros: Quick, relative ease
Cons: High interest debt

3. Big Bank Small Business Loan: This could also be the use of home equity or similar low interest collateralized loan. Typically taken from a bank or large money lender at published rates. In my experience this is very difficult to get without at least one success story under your belt. Defaulting can cost you your house.

Pros: Large sums, Low interest
Cons: Collateralized debt, track record needed

4. Venture Capital: So many success stories involve venture funding that it is easy to think this is the only way business ideas get funded. This is a great option if you idea is in some facet revolutionary, or mildly innovative in a field of interest to the VC firm. VC firms typically take a controlling interest in the company in exchange for their capital, which can be frustrating for the passionate entrepreneur. However, VCs can often provide the monumental sums that cannot be raised any other way. Typically, you need to have a compelling and differentiating business plan, and the patience to be rejected over and over again.

Pros: Enormous sums, no repayment
Cons: Very difficult, and not suited to all plans. Loss of control, track record a plus.

5. The Rich Uncle: While not always an option, friends and family are more likely to trust and understand the passionate entrepreneur and will frequently provide better payment terms and interest than lending institutions. However, defaulting will make you feel guilty, and may make family life uncomfortable. That said, many successful businesses have gotten their start this way.

Pros: Ease, terms
Cons: Risking family money can be worse than risking your own.

6. Grants: A new option to me, and one I am still considering. There are many institutions, the US government included, that gives away money to people who are doing things of interest to them in some facet. If your idea is, or can be adapted to fit that definition, you may be eligible for grant funding. Several colleagues of mine have raised thousands of dollars this way.

Pros: No repayment
Cons: Difficult to research, difficult to win

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Given the options facing a starving entrepreneur, what is the optimal path to funding?

The path I am going to explore follows:

Start with my own income capital, and build success on a small scale before approaching grant organizations for funding. Show them favorable track record on a small scale, and a detailed plan on how their funding will be used. This is an option for me as I frequently build charitable contribution into my plans.

Using grant funding to drive growth and payroll expansion, I will scout for a low interest small business loan, and more rounds of grant funding. The loan capital will be used as much as possible on appreciating or stable assets or property that can be used to collateralize it. After staying in the black for several months or a year, I will begin approaching VCs with the aim of structuring a deal that will pay off the loans and limit the level of control they seek. Ideal would be to gain funding from two firms so that their interests can be faced against each other when applicable.

Thoughts welcome.