Goal: Start Your Own Business

What It Takes To Fund Your Business

You’ve got it. The kick-a$$ business idea that’s going to let you say, “Boss, bye.” The business plan that outlines your strategy for turning your idea into something real that makes real money. And you’ll be in great company once you launch: In 2016, there were 11.3 million women-owned businesses in the U.S, which account for 38% of the country’s total business population.

But as you’re preparing to get your business off the ground, you need money — and in many cases, this involves asking people to give it to you. Cringe.

This is one of the most challenging and uncomfortable parts of being an entrepreneur. In the early days of Ellevest, I struggled with asking people to invest in our company (talking about money is taboo, asking someone for money makes me blotchy); then my co-founder Charlie Kroll helped me realize that we genuinely felt we were giving these investors an opportunity to get involved with something important and groundbreaking…and, we believed, profitable.

Having a strong understanding of what you want to do with your business is instrumental when you’re trying to raise money. There are a lot of options out there, and it really comes down to which type of funding makes the most sense for you.

What About Bootstrapping?

Most entrepreneurs start their businesses with their own money. They don’t get loans, and they don’t get investors. This is bootstrapping.

You may end up bootstrapping your business for a number of reasons. Maybe you don’t want to give up control to equity investors who become partial owners — and also decision-makers — once you accept their money. Maybe your business isn’t seen as fundable. Or maybe you think it’s better to have less money in the early days because it will force you to be scrappy and grow strategically. Or maybe you’re having a really hard time getting investors on board with your idea. (Unfortunately, this happens often for women, and it’s only getting worse.)

At Ellevest, we recommend having two years’ worth of take-home pay for your ‘Start a Business’ goal target.”

Whatever the reason, bootstrapping puts a lot of pressure on your finances, so savings can be crucial here. At Ellevest, we recommend having two years’ worth of take-home pay for your “Start a Business” goal target — though you can adjust that as you see fit — and we aim to get you to that amount or higher in five years. Two years is a helpful benchmark since it can take that long for a business to gain traction (and nearly one-third of all small businesses fail to make it to that point).

Speaking of saving money, sticking to a budget matters a lot when you’re bootstrapping. So you have to be smart about your spending; thankfully the cost of starting a business is significantly lower than it used to be. Opt for a coworking space instead of signing a lease on a commercial space if you need a physical office. Use the free business card service, free versions of software…you get the picture. It’s not glamorous, but it can help you keep expenses low while you’re working toward generating revenue.

Small business grants are also helpful when you’re bootstrapping because you don’t have to pay the money back or work out equity terms with investors. Depending on your business’s focus, you can apply for state and local grants, particularly with the help of the Women Business Center network. Private grants, such as the FedEx Small Business Grant, have fewer eligibility criteria, so they’re worth a look, too. (The federal government doesn’t offer grants for small businesses, but you can win money through the women-entrepreneur focused InnovateHER Challenge.)

But bootstrapping isn’t for everyone, and some businesses are better suited for it than others, such as those that will generate cash quickly after launching. And it can impede your growth: According to recent estimates, just one in 50 brick-and-mortar businesses and one in 10 online businesses have the potential to grow to $50-$100 million in revenue through bootstrapping alone. So if you want your business to become a big-deal household name, you may want to consider outside funding sources.

Considering Crowdfunding?

Crowdfunding is one option, and it’s proven to be a useful tool for women in business. Research shows that women-led projects largely outperform those led by men on crowdfunding sites. A 2014 study out of the University of Pennsylvania found that two-thirds of campaigns started by women succeeded in reaching their goals, whereas only one-third of men-fronted campaigns were successful.

How does crowdfunding work? On sites like iFundWomen, Kickstarter, and Indiegogo, you start a campaign for your project that offers tiered perks to backers (the more you give, the better the perk), and people contribute as much as they want. Plum Alley, which focuses on women-owned businesses, and FundersClub take a different approach, presenting members with a select group of private companies that they can invest in — and there can be a minimum required to invest in a company.

Running a successful crowdfunding campaign can make it easier for you to raise money from VC firms later.”

As with bootstrapping, crowdfunding doesn’t necessarily work for every business. Rewards-based crowdfunding tends to make sense if you’re selling products or services directly to consumers because it helps you build and connect with an excited fan base. And it allows you to retain complete ownership of your company.

Meanwhile, equity crowdfunding (a la FundersClub and First Democracy VC) lets investors fund startups in exchange for equity, rather than perks. In this case, you’re relinquishing some control — though the exact extent depends on the investment terms — but you can get valuable feedback and access to helpful networks via a wide range of investors.

Another difference between the two approaches is that equity crowdfunding is SEC-regulated and involves a lot of paperwork because you’re offering and selling shares in your company. Yeah, paperwork is a drag, but considering that most successful Kickstarter campaigns raise less than $10,000 and you can raise up to $1 million annually through equity crowdfunding, you can see why some entrepreneurs are drawn to it.

One last reason to consider crowdfunding? Researchers at UC Berkeley discovered that running a successful crowdfunding campaign can make it easier for you to raise money from venture capital (VC) firms later. It shows VCs that your idea has potential — and a captive audience. The Small Business Administration echoes those findings, noting that startups that raise more money via crowdfunding have a higher likelihood of getting VC financing.

How About Angels and Venture Capitalists?

Angel investors and VCs are the ones ponying up big bucks for the “next big idea,” and they’re usually interested in young, high-growth startups. Typically, angel investors invest less than $1 million early on in the life of a startup (seed stage) while VCs often invest more money later on (but still during a startup’s early stages).

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By the way, “next big idea” comes with a big asterisk because VCs don’t invest in women entrepreneurs to the same extent that they do men. In 2016, VCs invested $58.2 billion in men-founded companies whereas women got $1.46 billion. That’s not a typo. There are two main reasons for this huge funding gap: women got one-sixteenth (!) of the deals men did, and the average deal size for women-founded companies actually decreased from 2015.

On average, women entrepreneurs received $4.5 million per VC deal last year. Not great, but that’s still a lot higher than what you’re likely to get from crowdfunding; and VCs invest with a goal of big returns on their investments. This is why, though the terms vary by deal, VCs typically take an equity stake in the business, often get preferred stock (which means higher priority for payment than common stock), and tend to get at least one seat, if not more, on the board of directors. It may go without saying, but it’s worth saying: when on the board, VCs participate in the decision-making process for the business.

This makes this 2016 Harvard Business Review report all the more interesting. According to the study’s findings, VCs with female partners (which is just 38% of the top 100 VCs, by the way) do a better job of advising women-led startups; this is so much so that these startups are as likely to be acquired or go public as male-led startups. That isn’t the case when the VC only has male partners. This is yet another reason why I recommend going with angel investors and VCs that have a history of backing women entrepreneurs (you can find a full list in Mind the Gap: The Ellevest Guide to Closing Your Gender Money Gaps).

But before you pitch to any VC, make sure you have a firm grasp on your business goals and how much money you’ll need to reach them because this impacts who you pitch to and what you’re asking for.

Here’s an example. Let’s say you’re looking for funding early on, and I mean early, while setting up your business; you might want to try to get $500,000 from a micro VC to help you launch your operation. On the other hand, if you’re past the seed stage and are now focused on trying to grow your business quickly, pitching a traditional VC for a couple million dollars makes sense.

At the end of the day — which basically doesn’t exist for an entrepreneur, if I’m being honest — being an entrepreneur isn’t easy, and finding money for your idea isn’t easy either. So do yourself a huge favor, and take the time to find what kind of funding works for your business and your vision (maybe working alongside a VC isn’t your style). It may take longer than you had hoped, but it’s important for you to really understand the pros and cons of these different fundraising sources.

And then go get your money.

Disclosures

The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.

The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person.

Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Investing entails risk including the possible loss of principal and there is no assurance that the investment will provide positive performance over any period of time.

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