How to create startup capital
Even in the new millennium with all the advantages that its offers such the Internet, crowdfunding, and social networking, it’s still extremely challenging to raise startup capital for most ventures. Allow me to explain why. It’s a catch-22 situation because the smart angel investors and venture capitalists want to see some proof first that you have what it takes to be the successful entrepreneur who makes them money instead of losing it. This is reasonable since most people lack the necessary acumen, knowledge, and mindset that one needs in order to get past all the obstacles entrepreneurs are normally always confronted with.
On the plus side, the traditional route to success for entrepreneurs has been to create their very own startup capital. There are a number of obvious ways to do this:
– Keep your day job and build the business during evenings and on the weekends. This enables you to siphon part off your pay-check off to use as startup capital.
– Take out a loan before you quit your job for use as startup capital. This has to be done while you are employed and the use of proceeds should not mention any entrepreneurial initiative on your part.
– Tap in your personal savings but beware of any potential tax liabilities this move could trigger.
– Credit cards can be used if you really know what you are doing. Credit cards are a viable substitute for startup capital when used for situations when you can pay them off in full and quickly. For example, it can make sense to buy $10K worth of inventory on a card if you already have a customer lined up who will then immediately pay you $15K for it. You don’t want to use credit cards to buy office equipment or anything that doesn’t quickly create cashflow.
– The best startup capital comes from creating cashfloats. A cashfloat is created when you get paid today by your customers but have 30 or more days to pay your suppliers. The money you hold during this period is the “cashfloat.”
– Crowdfunding can be another source of startup capital but you need to have a very compelling project and a slick video presentation to hook potential funders. Many projects fail to attract money because they lack both.
– Convert assets into cash. Assets that can be sold include everything from financial ones such as stocks and bonds to art, furniture, and even your car. Get clear about your priorities and sell what you don’t need. If things work out as you plan you will be able to replace them all with better ones.
– Sales revenue as mentioned above under cashfloats is the best source of seed capital. If it is going to take a while to build or code your product, find similar to sell in the meantime. This enables you to both pull in cash to move the project forward and to get in front of customers who will most likely be interested in your main product once it’s finished.
– Please be wary of asking for business grants. While grants do exist for difficult to fund R&D projects, there aren’t any to help a rookie start their own business. Moreover, when someone asks for a business grant they are asking for free money that they will never have to account for by repaying the funder whether it be with interest, dividend, capital gains, or a simple return of principal.
The above are the most obvious ways to create startup capital. If you want to benefit from far more sophisticated methods for creating startup capital look into the newly updated Startups Guide.
I would two more sources to this.
1) Friends and families – This is similar to crowdsourcing except you are asking people you already know and who may be wiling to take higher risk with you. Now, this can be a double edged sword. If things don’t work out your relationship with them might get strained, so this needs to be dealt with carefully.
2) Partnership – If you can find a trusted partner who is willing to invest in your venture for equity stake you may be able to kick start the business without having to ask anyone. Of course you have to sacrifice equity in exchange.