Below are several sources of funds for both start-ups and established companies. The list is not exhaustive but is meant to give a broad perspective of where to obtain funds and the relative merits of those sources.
Source | Primary Role in Typical Financing Strategy | Positives | Negatives | Cost |
---|---|---|---|---|
Self | Initial money to at least document or demonstrate the idea to the point where other investors can understand it | Nobody's permission required | It's your money to lose | However much you are willing to risk |
Family and Friends | If more money is needed to get the idea to an invest-able point and the individual's funds are limited | These investors don't ask many tough questions | You could alienate friends and family if the money is lost | Friends and family and their money |
Angel investors (ex: informal group of knowledgeable individuals) | Early in the company concept stage | Some coaching and contacts | Some meddling by investors and regular results reporting | 5-10% of the company |
Venture capital (ex: traditional VCs, the Sandhill Rd. crowd) | Early stage typically before product and team are built | Don't have to pay the money back. VCs can also bring advice and partners | VCs involvement in the company may challenge management | Typically 20-50% ownership of the company |
Suppliers and trade credit (ex: parts vendors with net 60 day terms) | Available early in product development and pre production period if the vendor believes in the product and its customers | Easy source of credit | Few | Bundled in the price paid for the product or service |
Commercial bank (ex: Bank of America) | Available after the company has revenues and profits | Low cost | Money must be paid back in the future | Current market rates for borrowed funds |
Institutional investors (ex: Liberty Mutual , AETNA) | Invest just prior to an initial public offering | Typically pay a premium for stock | Few | Equity is sold slightly cheaper than at the time of the IPO |
Asset based lenders (ex: GE Credit capital) | Can be early in the life of a company where lender holds title to equipment in the company | Non equity source of additional cash | Requires monthly cash payments and the company risks repossession of equipment if the business does not meet certain financial milestones | Higher than straight bank debt |
Public equity (ex: NASDAQ) | Historically has occurred when a company is $10M or greater in revenues and profitable. Some companies today go public on the basis of a hot concept with little revenue and a period of substantial losses ahead. | Access to large amounts of capital. Liquidity for investors | Scrutiny of investors, inability to give employees very low cost options, cost of public accounting and reporting, defocusing of top management away from the customer and toward Wall Street | High in terms of management time and energy |