To celebrate National Small Business Week, we’ve put together a four-part series that delivers honest, helpful advice from successful entrepreneurs.
Stop us if this sounds familiar: You have an idea for a startup. You believe it’s going to be big. You start down the path of building your business when you realize everything costs more than you thought. Not to mention that nagging question of how you’re going to pay rent, eat, and, well, survive. It all boils down to one question: How am I going to fund this?
Taking out a loan is often a solid choice—but it’s not the only one. We highlight three common financing options to take an idea from a dream to a reality, as well as key takeaways from founders who have successfully done it.
The money strategy: bootstrapping
Bootstrapping a business means you don’t rely on outside capital to grow your business, but instead use savings or sales to fund the trajectory of your company. While venture capital gets most of the buzz these days, fewer than one percent of startups actually raise venture capital. Many small businesses survive on their savings or revenues.
While Alexander Cohen, a WeWork Labs member at WeWork 80 M St in Washington, D.C., initially asked friends and family to invest in his company, TwentyTables, a startup that helps consumers find meals at nearby restaurants for a fixed price, he’s since bootstrapped to take the company from five to more than 100 registered restaurants, while increasing its customer base by 1000 percent. The company’s growth earned it Best Bootstrap Award at SXSW’s 2019 pitch competition.
Why I chose bootstrapping: “Strategic investors are powerful allies and can be a catalyst for scalable growth, but a disconnect between startup and investor values, especially at the initial stages, can doom a company’s viability. Bootstrapping was the best way to ensure that TwentyTables didn’t suffer that fate.”
The perks: “Starting a startup is all about execution, and when it’s revenue that keeps the lights on, you wake up every morning motivated to execute at the highest level. Bootstrapping TwentyTables puts into very real focus the importance of our customers—restaurants and consumers—because their engagement, in a literal sense, drives TwentyTables forward.”
The challenges: “One of the main challenges with bootstrapping a startup is the limited resources available for any given purpose. But at the same time, that leanness forces you to stay focused on your customers.”
The money strategy: crowdfunding
From Kickstarter to Indiegogo to Republic, there are many paths to turn small donations or investments into big money. As a result, you’ll want to pick a platform that aligns with your goals. Some crowdfunding platforms, for instance, only release the money you’ve raised if you hit your goal. Fall short of your target? You may walk away with nothing. Understanding the terms, fees, and fine print of different crowdfunding companies will be key when choosing the best option for you.
When Adriana Vazquez, a Labs member at WeWork 81 Prospect St in Brooklyn, New York, came up with the idea for her company, Lilu, a breast pumping bra with automatic massage that helps moms produce more milk, she knew she had a dedicated community ready to back her. Her Kickstarter campaign proved she was right: She surpassed her goal, raising $33,377 for her first batch of bras, scheduled to ship this month.
Why I chose crowdfunding: “Since day one, we’ve been able to connect with women who are excited to give feedback about their current or past experience breastfeeding and pumping. Before we started Lilu, we sent out a survey to a handful of moms with a few questions about pumping equipment and products. The next morning we had more than 500 responses from moms with one particular gripe: Breast pumping sucks—and we realized it was worth investing time and effort into redesigning that experience. A crowdfunding campaign was an option because we knew that there was a strong community of people who wanted to see change in this space.”
The perks: “Our campaign got us a lot of inbound traffic from around the globe. It was really rewarding to hear from parents in Australia, Hong Kong, the UK, and other places who wanted to find out when we can ship abroad. It’s a great incentive to keep going—we know people want our product.”
The challenges: “We offer a product that you typically need right away and you don’t have the luxury of waiting a few months, let alone years, to get it. Planning the timing of the campaign to match our development process was very important, so backers wouldn’t have to wait long to access the product once we hit our goal. Also, a lot of people have been burned by Kickstarters that don’t deliver on time, so being able to instill confidence in new buyers was a challenge.”
The money strategy: investment capital
When you raise investment capital you give up equity in your company to investors who put up the financial backing to help you grow and scale. This type of money can typically come from two main sources: angel investors, who invest their own money, and venture capitalists, who are more likely investing on behalf of clients (family offices, endowments, and pensions). Venture capitalists tend to invest more, so they’re usually looking for at least 10x returns and seek companies that can scale quickly.
Eiko Nakazawa, a Labs member at WeWork 175 Varick St in New York City, raised capital from five angel investors—before she even had a product—to fund the creation of Dearest.io, an early childhood education startup that solves the quality and flexibility issues of childcare by using small-group programs hosted in homes and communities.
Why I chose investment capital: “We decided to work with angels who support the mission of our business and have experience working with or on startups.”
The perks: “So far, our angels have been our strongest supporters. From making introductions to giving me great advice, they have been incredibly generous. Even in bad months, I get encouragement from them. This gives me the power to keep going.”
The challenges: “We are now onto the next round of financing. Early childhood education is not a sexy or relatable field for many VCs, so I try to communicate the new value we are creating and the quantifiable proof points to address industry-specific concerns. I recommend finding investors who understand the problems you are solving, and believe in you.”
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