And the investments have expanded beyond software and hardware into anything that is tech-adjacent — dog walking, health care, coffee shops, farming, electric toothbrushes. Oh Lin said.
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Entrepreneurs are even finding ways to undo money they took from venture capital funds. Wistia, a video software company, used debt to buy out its investors last summer, declaring a desire to pursue sustainable, profitable growth.
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Buffer, a social media-focused software company, used its profits to do the same in August. Afterward, Joel Gascoigne, its co-founder and chief executive, received more than emails from other founders who were inspired — or jealous. Gascoigne said.
But in the last decade, its gospel of technological disruption has infiltrated every corner of the business world. Old-line companies from Campbell Soup to General Electric started venture operations and accelerator programs to foster innovation. Those who tried to buck the conventional method experienced harsh trade-offs. Bank loans are typically small, and banks are reluctant to lend money to software companies, which have no hard assets to use as collateral.
Founders who eschew venture capital often wind up leaning on their life savings or credit cards. Jessica Rovello and Kenny Rosenblatt, the entrepreneurs behind Arkadium, a gaming start-up founded in , initially avoided raising venture money. It took four years before the business earned enough to pay them a salary. Rovello said. Nevertheless, the business grew steadily and profitably to employees.
Rovello wanted to keep running the company profitably, growing revenue at 20 percent per year and developing a new product that could take years to pay off. In September, Arkadium used its profits to buy out the investors, allowing the company to remain independent and grow on its own terms. Rovello said she had no regrets about stepping off the venture-funded path.
In September, Tyler Tringas, a year-old entrepreneur based in Rio, announced plans to offer a different kind of start-up financing, in the form of equity investments that companies can repay as a percent of their profits. Hundreds of emails have poured in since the announcement, Mr.
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Tringas said in an interview. Many use variations of revenue- or profit-based loans. Those loans, though, are often available only to companies that already have a product to sell and an incoming cash stream. Other companies are inspired by the investor buyouts executed by Buffer, Wistia and Arkadium, and are asking investors to agree to similar deals — at potentially lower returns on their investments — in the future.
Fund your business
In the typical venture capital model, the earnings for a home-run deal are limitless. When Indie. Roberts said. For that reason, the business has gotten a bad reputation over the years. That said, the economic downturn has forced companies to look to alternative financing methods and companies like The Receivables Exchange are trying to make factoring more competitive. The exchange allows companies to offer their receivables to dozens of factoring companies at once, along with hedge funds, banks, and other finance companies. These lenders will bid on the invoices, which can be sold in a bundle or one at a time.
Read more on financing your business with factoring. Lending standards have gotten much stricter, but banks such as J. Morgan Chase and Bank of America have earmarked additional funds for small business lending. So why not apply? Read more on what you need to know about filling out a loan application. Using a credit card to fund your business is some serious risky business. Fall behind on your payment and your credit score gets whacked. Pay just the minimum each month and you could create a hole you'll never get out of.
However, used responsibly, a credit card can get you out of the occasional jam and even extend your accounts payable period to shore up your cash flow. Read more on financing your business with a credit card. If you're unemployed and thinking about starting your own business, those funds you've accumulated in your k over the years can look pretty tempting. And thanks to provisions in the tax code, you actually can tap into them without penalty if you follow the right steps. The steps are simple enough, but legally complex, so you'll need someone with experience setting up a C corporation and the appropriate retirement plan to roll your retirement assets into.
Remember that you're investing your retirement funds, which means if things don't pan out, not only do you lose your business, but your nest egg, too. Read more on financing a business with your k.
A crowdfunding site like Kickstarter. Your friends, family, and strangers then use the site to pledge money.
New kinds of capital
Kickstarter has funded roughly 1, projects, from rock albums to documentary films since its launch last year. But keep in mind, this isn't about long-term funding. Rather, it's supposed to facilitate the asking for and giving of support for single, one-off ideas. There's no long-term return on investment for supporters and not even the ability to write off donations for tax purposes. Still, that hasn't stopped close to , people from pledging to Kickstarter projects. Read more on using Kickstarter for business.
How to Get Money to Start a Business – 8 Startup Financing Options
Young, ambitious and willing to make a bet on your future earnings? Through an online marketplace called the Thrust Fund, the three have offered up a percentage of their future lifetime earnings in exchange for upfront, undesignated venture funding. Beware: the legality and enforceability of these "personal investment contracts" have yet to be established. Read more on trading future earnings for funding now. When pitching an angel investor, all the old rules still apply: be succinct, avoid jargon, have an exit strategy.
But the economic turmoil of the last few years has made a complicated game even trickier. Here are some tips to win over angel interest:. Read more on finding an angel investor. With banks reluctant to take any chances with their own money in the wake of the credit crisis, loans guaranteed by the U. Small Business Administration have become a hot commodity. Indeed, funds to support special breaks on fees and guarantees on SBA-backed loans have run out a number of times. And while SBA-backed loans are open to any small business, there are a number of qualifications, including:.
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Read more on getting an SBA loan. Hitting up family and friends is the most common way to finance a start-up. But when you turn loved ones into creditors, you're risking their financial future and jeopardizing important personal relationships. A classic mistake is approaching friends and family before a formal business plan is even in place. To avoid it, you should supply formal financial projections, as well as an evidence-based assessment of when your loved ones will see their money again.