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Angel, VC, Crowdfunding, or Bootstrap – Which Funding Model is Right for You?

3p Contributor | Monday September 17th, 2012 | 1 Comment

By Christa Avampato

You’ve got your business idea nailed down. You have a talented team lined up behind it, and perhaps have a working prototype with feedback. Now, it’s time for funding to take your idea to the next level.

Not all funding sources are created equal. In fact, different sources are right for different entrepreneurs and different business ideas. Here’s a quick and dirty breakdown of common funding possibilities for your business:

Angel investment

What is it?
An angel investor, exactly as the name implies, helps a good idea get off the ground by providing the necessary cash for launch. In return for taking this risk, the angel typically receives a piece of ownership, or equity, in the company. Angels typically have a fair amount of personal wealth that they use to fund ideas that they believe can and will turn a profit somewhere down the line. They are often entrepreneurs themselves and are therefore usually a rich source of advice, counsel, and contacts for early stage startups.

Who is it right for?
Angels typically provide the seed funding for an idea. Entrepreneurs who are comfortable sharing some ownership over their idea can greatly benefit from having the right angel investor.

Where to find it
Because angels are giving their own money to fund a project, there isn’t a clearinghouse or exchange of any kind to which an entrepreneur applies. Angels are often found through referrals and networking, which includes everything from sending a personal letter of inquiry to meeting at an event.

Venture Capital

What is it?
Unlike angel investments, venture capital, or VC, funding is provided through a professionally managed fund and is typically for a larger amount of money than an angel investment. VC funding usually comes into play after a business has gotten off the ground and needs further funding for expansion. They almost always require a high amount of equity from companies in which they invest.

Who is it right for?
Entrepreneurs who feel comfortable with parting with a significant equity stake in their business may find that VC funding is a good source for them. Because VCs take a large equity stake, they also have quite a bit of control over the decision-making process of the business as they hope to turn a sizable profit from their investment. They realize this profit when the company is sold to someone else, so the goal of VCs is to grow and then sell a business.

Where to find it
Like angel funds, attaining VC funds often comes through referrals and networking. Many VC funds often hold events at which entrepreneurs pitch their ideas in the hopes of piquing the interest of a VC.

Crowdfunding

What is it?
Crowdfunding describes a system in which many people give comparatively small amounts of money to help fund an idea. There is usually no exchange of ownership with crowdfunding, though this is beginning to change slowly. The idea of crowdfunding predates the internet, however it really became a part of popular culture with the help of online networks. Crowdfunding is not limited to businesses and is also used to fund nonprofit organizations and charitable acts that never expect to turn a profit.

Who is it right for?
A wide variety of ideas and organizations are jumping on the crowdfunding bandwagon. From political campaigns to nonprofits to small business to individuals who want to create something new in their community, crowdfunding engages an audience that has a lot of passion, even if they lack significant individual financial means.

Where to find it
With the success of Kickstarter and Kiva, many crowdfunding sites are popping up, some specializing in specific types of crowdfunding requests. For a listing of the top 10 crowdfunding platforms, check out this link from Plan to Start.

Bootstrap

What is it?
Simply, bootstrapping typically defines the use of personal funds as well as those from friends and family to launch an idea. It is by far the least expensive and most pervasive form of startup funding. Bootstrapping is not just the source of small operations. Dell and Facebook both received their initial funding through bootstrapping.

Who is it right for?
Chris Guillebeau’s recent book, The $100 Startup, champions this kind of funding for just about everyone with an idea that they want to prototype and test.

Where to find it
Look no further than your own bank account or your immediate circle of contacts to raise a bit of money for your test.

This is a brief run down of common funding sources for new ideas. Of course, there are others such as getting a loan at your local bank. To identify the right funding channel, understand the differences between the different types of funding and more importantly, know what kind of entrepreneur you are – your comfort level with risk, ability to take and act on feedback and advice, and desire to share ownership of your idea. All money comes with strings. Make sure they’re strings you can and want to live with.

Christa Avampato is a business strategist, writer, and yoga and meditation teacher based in New York City. She blogs daily about the art of creative living at Christa In New York: Curating a Creative Life and is an advisor for LaunchHouse, a business accelerator and seed capital fund.

image: Miguel Angel Lopez Trujillo via Flickr cc (some rights reserved)


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