Finding capital for start-ups remains one the greatest challenges for the begining entrepreneur. So for this post we will discuss a number of ways that the budding business tycoon can find that critical first funding.
Law Firms and Accountants
A law firm specializing in business law or corporate law, or an accounting firm, that is keyed into the local start-up and venture capital scene will be a valuable resource for the start-up company. Not only will they know many of the prominent investors in start-ups and early stage companies but they will be able to provide guidance both as to the legal as well as business issues that you will encounter on your path. In many cases, valuable information may be found for free on their websites and blogs. In Los Angeles, for example, the Law Offices of Bennett Jay Yankowitz provides a number of detailed articles on their website. You can check out the Law Offices of Bennett Jay Yankowitz Facebook page here.
They also have an interesting video that provides a detailed timeline for the growth stages of a company, from formation and seed capital through IPO and beyond.
Friends and Family
Traditionally, most start-ups begin with capital from the entrepreneurs’ friends and family. Often, friends and family will be the only ones who believe enough in the prospects of the project to put up funds; unlike angel investors, their primary motivation is not always economic. Because start-ups are the riskiest of investments, friends and family investors should be prepared to loose their entire investment and thus should limit the amount of funds they put at risk to a relatively small percentage of their total assets.
Angel Investor Networks and Websites
Unlike friends and family, angel investors are professional investors in start-ups and early stage enterprises. They are usually individual investors, as opposed to organized venture capital firms or funds, and are often successful entrepreneurs who have made their money through taking one or more companies from startup to IPO or sale. Finding the right angel investor is not easy. Referrals from your law firm or accounting firm are always good but may be difficult to obtain. You should definitely look at the leading angel web sites, such as AngelList.
In many areas of the country that have an active investment community, there are angel investor groups that meet regularly to hear presentations by groups seeking funding. For instance, in St. Louis there is St. Louis Arch Angels and Saint Louis University’s Billiken Angels Network. Both actively seek business plan submissions and hold regular workshops and pitch sessions.
Paid Brokers, Placement Agents and Consultants
There a plenty of consultants, finders and placement agents who will do everything from help you prepare your business plan and presentation deck to finding investors for your new company. You need to be very careful using these; the fees can be substantial, generally in the range of 5% to 8% of the amount of funds raised in cash plus equity in your company in the form of stock or warrants. Many of these firms will push for an upfront cash fee to cover “marketing expenses” or will want a monthly cash retainer.
Be sure to carefully check out any consultant, placement agent or finder before committing to any payments, especially substantial upfront payments. Ask for multiple references and then call each one and grill them. Raising funds is not easy and you need to make sure that before you spend your hard earned money, you have a good chance of actually raising the funds you seek.
Equity Crowdfunding is Coming
Can I raise funds for my start-up on crowdfunding sites such as Kikckstarter and IndiGoGo? It depends. Crowdfunding sites may be used to fund creative projects, such as art, comics, videos, games and technology, and the funders may receive a copy of the resulting product or another form of participation, such as a viewing of a film. But the creator of the project must keep 100% of the ownership. Crowdfunding sites may not offer financial incentives like equity in the company creating the project or repayment of a loan.
In fact, as of this writing, it is illegal for a project listed on a crowdfunding site to offer equity, which means that you can’t sell stock, units in a limited liability company or other forms of equity or debt through crowdfunding.
In 2012, Congress passed the Jumpstart Our Business Startups Act (the JOBS Act). Among other things, the JOBS Act directed the Securities and Exchange Commission (SEC) to implement a regulatory regime for permitting, and regulating, equity crowdfunding. In October 2013, the SEC published almost 600 pages of proposed rules for equity crowdfunding sites and offerings. However, the proposed rules have been languishing at the SEC, and it is unclear when the SEC will release final rules so that equity crowdfunding can finally become legal in the U.S., as it already is in many other parts of the world.
Equity crowdfunding is a complicated topic. The law firm mentioned above has several excellent, in-depth articles, and puts out regular updates. You can keep up to date on this subject by following the Twitter page for Law Offices of Bennett Jay Yankowitz, a business lawyer located in Los Angeles, California.