Hi, everyone. This is Alejandro Cremades, and today we’re going to be talking about
the sources of funding for your business. Essentially, there are different sources of
funding. You’re going to have the ones for businesses where they’re a little bit more
mature, and then the ones that are a little bit better or more advantageous for those
that are more on the earlier stages and the early days of building and scaling their business.
So with that being said, let’s get into it.
The first source of funding is bank loans. Obviously, banks, as we know them, they’re
at the worst numbers of issuing and financing to businesses since the 1940s. For that reason,
I think that if you’re an early-stage business, where you don’t have any assets or things
that you can put as collateral, I think it’s going to be very difficult for you to be able
to secure any type of financing from a bank. And then also, the problem that comes with
getting funding from a bank is that you are going to have to make those repayments, which
really takes out from the cashflow of your business. That’s definitely one, but not
the one that I would recommend the most. The next source of funding is equity crowdfunding.
Now, equity crowdfunding is when you are putting your venture up on one of those online platforms
such as, for example, SeedInvest or maybe StartEngine or one of those other platforms
that are connecting startups with accredited investors.
Essentially, what you’re doing there is you’re just putting up your materials, you’re
putting up your business, you’re putting a price tag on your business and a price-pre-share
that you’re giving to the investors that are coming in and making an investment in
your business. This is small investors that are putting small ticket sizes in your businesses,
and those types of investments or financing rounds tend to be on the smaller end.
The next source is really donation-based crowdfunding or perhaps any type of crowed funding source
that doesn’t require a contractual obligation, just like the one that you would find on equity
crowdfunding. On the nation-based crowdfunding, which is the type that you would find on platforms
like Kickstarter or Indiegogo, what you’re doing is you are creating a project, an initiative,
and preselling your product or giving something in exchange for those people that are contributing
something to you. Maybe you are giving them an item, or you’re basically giving them
a product, or just to put something out there like a pair of shoes, or a book that you’re
about to sell, or maybe something that is tangible.
On donation crowdfunding platforms, let’s say the tech type of projects don’t perform
very well because what are you going to be giving them in a way for their contribution
– early beta test to your service? It’s not really appealing, so typically on donation-based
crowdfunding, what performs very well is when you have a tangible product that you can give
in exchange, or perhaps there is a cause that is really capturing and inspiring people to
contribute. The next source of funding is friends and
family. Maybe you have your cousins, your uncles, your parents, your friends. They also
call it the Friends, Families, and Fools. But, again, I think that if you don’t want
your Thanksgiving dinner to be a shareholder get-together, a shareholder meeting, where
they’re going to be grilling you on: how is the evaluation? How has it been increasing
over the last week? I would highly encourage you to avoid taking
money from friends and family. In many cases, if things don’t pan out as promised or as
expected, perhaps that relationship would go south. So, for that reason, I would highly,
highly not recommend going with the friends and family source of financing.
Then you have the angel investors. The angel investors are not the ones that have on LinkedIn
the angel investor title. Those are the ones that are going to waste your time, which are
just going to be putting a $5,000 check in your business. Angel investors are those that
are either senior executives that have an idea or have domain expertise on what you’re
doing or perhaps successful entrepreneurs that just exited their business and that are
now investing and using this as a way to pay it forward.
Next, you have the angel groups. In essence, angel groups are a way in which those angel
investors are coming together and grouping their investments to invest in your business.
Now, angel groups are investing in different ways nowadays. They’re either investing
via a special purpose vehicle, which is a vehicle like an LLC that they use to group
them all, and invest, and count as one in your cap table, which is that ledger that
keeps track of who owns what part of the business – essentially, who owns what piece of the
pie or what kind of equity. Then, you’re going to have these types of
investments in the form of, let’s say, direct investments where those investors, those angels
who are members of that group, just making investments directly. Then, lastly, we’re
starting to see that many angel groups are creating venture capital funds to make investments
in those companies that they are excited about. Next, we have the startup accelerator programs.
Those are like Y Combinator, Techstars – those are the best, and essentially, you’re getting
a small amount of money. It typically ranges between $10,000 all the way to $100,000. What
happens is that you’re giving them in exchange 5%-10% of equity in your business, and you’re
committing to spending three months with them, perhaps in the Bay Area or in New York or
wherever they are based to have them help you in scaling things up, in plugging in their
networks, and in their making introductions to investors, which happens in the form of
Demo Days. Essentially, that’s the way accelerators work.
Next, you have the venture capital firms. Venture capital firms tend to come in a little
bit later. Venture capitals invest in people, and they are going to take the risk of coming
in at the early stage of the business. But what they want is to see that there is a product/market
fit that you’ve been able to have a product in the market and validate it somehow.
Venture capital firms typically start to invest bigger amounts. We’re looking at $500,000
and up, and they would continue to reinvest potentially all the way until your business
does an IPO or until your business is acquired. Here, you’re talking with sophisticated
people, people that are investing for a living, and then also people that have great networks
that can really support you and take it to the next level.
The last source of funding is credit cards. But I would highly, highly not recommend that
you do credit cards because it’s like the saying: once you pop, you can’t stop, and
then it’s very hard to back-peddle from that. In many cases, what I see is founders
that use credit cards, and then they get repaid back from the future investors that come in,
but this is super risky, and I would not recommend going the credit card route – and also,
because the interests are very high and probably don’t justify going via this way.
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said, thank you so much for watching.