For most startup and early stage technology companies, it’s not long before more money is needed to fund the business. But what type of funding is best?
The truth is, there are a LOT of different financing options out there for young businesses to pursue, including some that inexperienced (and even some more seasoned) company founders might never consider.
Each comes with its own set of pros, cons, and considerations, however — and not every option is the right fit for every company. Earlier in the year, venture capitalist Fred Wilson (recognizing a lack of coverage on the Web) posted a weekly series on his AVC blog covering several of the primary ways startups can secure financing. Each post breaks down the ins and outs of a particular option, covering the bare essentials that every tech entrepreneur should know.
The posts are definitely worth the read for anyone leading a young technology startup, as are the hundreds of insightful comments from others in the industry (OK, so maybe you don’t have to read all the comments).
Here are the 11 finance options for young tech companies that Wilson covers (with links to each of the complete posts):
As Wilson explains, this is often the first place entrepreneurs turn for their initial “round” of funding. Of course, borrowing money from those close to you can complicate things in a hurry – especially when it involves the large sums required for a startup.
A relative newcomer to the world of startup financing, Wilson notes that accelerator programs can be a great fit for young teams without a lot of business experience. Contest and prize options have also become more popular in recent years, and can work well for young companies in need of an initial boost in cash flow.
Do you trust the government? OK, loaded question. But as a form of financing, Wilson has seen many businesses take advantage of these types of grants. But while it might seem like free money on the surface, Wilson warns that there could be quite a few strings attached to those bills.
Financing from customers? Yep, you read that right. Wilson describes this option as basically finding early customers to put up money for your product – before it’s completed (or in some cases, even started at all). Naturally, the benefits are huge here, but not every startup is quipped to pull this type of financing off.
While not entirely common in the world of startups, Wilson notes that some tech companies can benefits from getting suppliers to finance their young businesses via areas like equipment and development for equity.
Also referred to as convertible loans or convertible notes, this form of financing basically allows companies to borrow money that will be converted to equity for the investors later. This can be a preferable option for businesses, Wilson notes, with investor compensation sometimes taking the form of warrants or discounts.
This financing option happens to be Wilson’s specialty, so as you can imagine, he has quite a bit to share. In fact, as he explains, almost all VC firms and many angel and seed investors require preferred stock as part of their deals.
8. Venture debt
“If there were two words [least] likely to be found together, it would be venture and debt,” Wilson writes. But that hasn’t stopped venture debt from making waves as a growing form of financing for young companies in the technology sector.
Wilson describes this as a one of the least expensive forms of startup financing, giving companies the opportunity for debt financing leases and loans for equipment like servers, routers, and so on.
10. Bridge loans
While these types of “short term transaction-driven loans” are universal in business, bridge loans can be a risky endeavor for investors dealing with startups. Of course, that doesn’t make them uncommon, but they do come with their share of risks and red flags, as outlined by Wilson.
The success of this last financing option is closely depended on a company’s balance sheet. There are issues to watch out for here, but Wilson does a pretty thorough job of breaking down the nuances for technology companies to consider.
Which startup financing options have you had success with? Sound off in the comments below!