In a culture that is increasingly rewarding of entrepreneurship, it's interesting to note the difficulties that many young entrepreneurs are experiencing as they try to get funding for their business ideas. In some ways, it's to be expected -- after all, most 18 to 24 year-olds don't have enough of a credit history to reassure banks about their potential to pay back any loans. But millennials are now increasingly likely to look for alternative forms of finance, ones that cut out banks entirely.
The growth of accelerator programs such as 500 Startups and Grand Central Tech and startup incubators is a testament to this, as are investment companies such as Braavo Capital and crowdfunding platforms like Kickstarter and Indiegogo. These alternative methods of funding are growing in popularity, but what are the pros and cons of raising capital this way? Here is the information you need to know in order to get the most out of your alternative financing.
Specialty Finance and Lending Platforms
Traditional models of finance have held sway for years, but for certain emerging markets, these models are hindering rather than helping. As a result, we've seen the emergence of specialty finance and lending platforms that can offer businesses capital without requiring them to give up part of their company. Braavo Capital is one such company, providing funding for mobile app companies via a data-driven financing platform.
Braavo's co-founder Mark Loranger says that his goal was "to create a new way to provide financing to a rapidly growing industry, where other types of financing were not good fits." Braavo aims to disrupt the way app companies receive capital by using technology to deliver customized funding to each individual mobile app. This approach allows app developers to sidestep the lengthy and costly process of raising venture capital, and put their new-found funding to work as soon as possible.
Startup Accelerators and Incubators
Let's get one thing out of the way: accelerator programs and startup incubators are often confused, but far from the same thing. Accelerators are "fixed-term, cohort-based, and mentorship-driven", culminating in a "graduation or 'demo day'". Think of an accelerator as a school, of sorts, where a group of people (or companies) gather together for a set period of time to learn from seasoned professionals. Startup incubators, on the other hand, are companies that offer resources to startups -- anything from money and office space to advice and networking opportunities -- in exchange for a certain amount of equity. Unlike accelerator programs, which generally have 3-4 month terms, companies in an incubator have a much longer gestation period -- anywhere between 1 to 5 years.
What should companies looking to enter into either one of these programs be aware of? It might sound obvious, but they need to think about what they want to get out of it. If it's just a matter of getting funding, there may be other, less intensive options out there. On the other hand, if you're having problems with your revenue model or need advice on how to present to investors, the ability to ask experienced entrepreneurs for their input would be immensely valuable, not to mention the access to capital and media exposure that being part of an accelerator or incubator would bring.
There are a lot of benefits to being a member of 500 Startups or Techstars. That being said, there are also some downsides; for example, both programs require companies to give up a chunk of equity in exchange for joining. In addition, it's important to remember that incubators are businesses too -- and like any other business, they're looking to get return on their investment. As a result, if your organization has goals other than getting investors, it may be hard to square those with the aims of the incubator.
Crowdfunding works best for companies looking to offer a product or service -- a toy to help kids learn to code, for example, or the chance to stay in a "Human Cocoon" in the Riviera Maya. Turning to crowdfunding allows entrepreneurs to sidestep having to relinquish equity to angel investors, accelerators and incubators, but it does come with its own set of risks. Unlike acceptance into an accelerator program, crowdfunding doesn't guarantee that your business will get funded; most sites, including Kickstarter, don't start collecting money until the fundraising goal is reached. And there's always the additional risk that the goal wasn't set high enough to begin with, which would make it difficult to give people the rewards promised for their contributions (and raising the possibility of a lawsuit).
For companies only looking to secure capital, crowdfunding can be a boon. But as with any other form of fundraising, companies have to be able to present their product well and offer incentives for investment.
In many ways, there's never been a better time to be an entrepreneur. From specialty lending platforms to startup accelerators and incubators to crowdfunding sites, there are quite a few ways for businesses to get the funding they need. Provided you have funding options and an unlimited reservoir of coffee, you'll have a pretty solid chance at success.