Startup Advantage: 4 Ways To Get Funded

Go to any event catering to entrepreneurs or startups in general and it won’t take long at all before someone starts talking about angel investors, venture capital, seed money, PPMs, or, for those who prefer the more direct approach, getting funded. After all, isn’t the goal of most companies now, attracting someone else’s money to grow to critical mass, then cash out for big dollars?

For most, the answer is a resounding YES!

This is a marked difference from the last generation whose goal was to start a business, grow it to the point they are making a comfortable living and, maybe, bring the kid(s) in to keep it going after retirement.

In my conversations with those exciting and excited souls in the funding-seeking start up world, attracting money is the goal. However, few of them understand just how that process works. More importantly, most don’t know that there are several options to attract that capital and launch that idea into a force to be reckoned with.

I’m here today to change that.

(For those of you who are not familiar with me personally, I am a licensed attorney, Certified Financial Planner®, have earned, held and taught others to earn various securities licenses, prepared and executed Private Placement Memos, testified in securities trials and, somewhere along the way was a training director and Sr. VP of Marketing for a decent sized company. In the past year a few people told me that my varied background would be valuable in the startup world – quite active where I live. I have jumped in, love it, and hope to make this part of the business world my home!)

Here are a few different ways that you might consider funding your business, along with some unsolicited comments from my perspective.

Venture Capital

Of course venture capital (or VC) is the most sought-after source of funding. One attractive point about VC is that VC begets VC! When a company hits it big, very, very often, the individuals that cashed out in a big way become the investors in other ventures. Another advantage, although the businesses trying to get the money don’t necessarily like it, is that VCs force you to put the basics in place to make your business successful. They will require a business plan and management team among other things.

The way to attract the VC money is, of course, pretty simple to say and a little more difficult to pull off. Generally, VC firms look for big ideas in a potentially big market. Your idea might be fantastic, but if there are 40 others just like it on the market or, worse yet, the market is so specialized you could sell to everyone and still not have lots of revenue, you will have a hard time getting the attention you seek. But if you have that big idea for the big market, the next step is to get an appointment with a VC firm that is interested and then blow them away with your presentation in the 15 minutes or so they will listen.

See, I told you it was easier said than done.

Angel Investors

Despite the religious and spiritual overtones, the term “angel investor” simply refers to someone close to you – usually a relative – who has enough money around to fund your venture. While that is the traditional definition, recent broadening of a key section of the Securities and Exchange Act of 1933 has allowed certain sophisticated investors to invest directly in businesses without the time, hassle, and expense normally associated with securities offerings. The result is a broadening of the angel investor concept beyond the traditional friends and family model.

This change in the securities law may well be the best friend of a startup. It allows you a simplified path to solicit investors, even a limited number of ones that do not meet the definition of “accredited” which is typically required in a limited securities offering. You could solicit friends and family for smaller amounts and can give them equity or even bonds (debt) in your company in return.

Don’t overlook this path!

Crowdfunding

The JOBS Act of 2012 changed the way some businesses raise money. Sort of.

The act was obviously targeted at start ups since its formal name is even the Jumpstart Our Business Start-Ups Act of 2012. The good news is the JOBS Act contains a section explicitly allowing an exemption from securities laws for crowdfunding. The bad news is that the law requires the SEC (Securities and Exchange Commission) to write rules to allow this exemption and it hasn’t done it. Thus far, the SEC has published one paragraph, the main import of which is, “we are reminding issuers that any offers or sales of securities purporting to rely on the crowdfunding exemption would be unlawful under the federal securities laws.”

Luckily, states are slowly taking matters into their own hands and issuing state rules on crowdfunding. So it can be done in most cases.

Simply stated, a business puts its idea up on a crowdfunding site and, in exchange for something like free product or even a small bit of equity in the company, anyone can donate who wants to. In essence, rather than chasing one or two big investors, a crowdfunding allows you to find lots of little ones.

Retirement Plans

There are hundreds of rules and regulations applying to “qualified” retirement plans, the most common types being the 401K and the IRA. And, believe it or not, there is a mechanism by which you can access your retirement plan money without penalties and even income taxes!

The process is complicated. Oversimplified, it involves rolling your retirement plan into a new retirement plan that is administered by a company that allows the transaction. Then your new plan purchases shares in your company and, bingo, your 401k is now fair game.

Here are three things to consider quite carefully before you do it:

1. That new entity that is administering your plan is not free. You will have additional expenses and fees that you don’t pay now.
2. Despite your intentions and dreams, your business may not succeed. You could burn through your retirement money and have to start all over at age ?? Most do.
3. The government has an acronym for this process: Rollovers for Business Start-ups: And that is the result in the vast majority of cases – you lose your money.

 

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