Every start-up founder hopes one day for their project/technology to succeed, reach the market, and quite often improve patients’ lives. Funding is just one of the critical hurdles in the early stages. The following list will explain just a few of the many sources of investment.
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Bootstrapping: Sometimes the best source of funding for a small business can be its entrepreneur(s). Bootstrap financing is starting a business with minimal capital mostly provided by a person or group of people from the start-up team. This often includes dipping into savings, retirement, personal loans (including home equity), or accessing credit cards. This is the most common type of financing in small business. Given the costs involved with a pharmaceutical or medical device company this approach can be challenging, but for a software company can be a successful approach.
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Friends and Family: Sometimes the best way to gain access to funding is through the people who are closest to you. Tapping your family and friends to invest in your start-up can strain relationships and is only advisable if they fully understand the risks involved with your start-up. Forbes suggests that a loan from friends and family is sort of like a “grant with no strings attached,” but a more formal agreement is advisable and will allow a smooth, transparent investment that is beneficial to all.
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Crowdfunding: The rise of the internet has provided a new type of funding known as crowdfunding. Websites, like Kickstarter and GoFundMe, have altered finance by connecting individual or small groups of investors who may not have had access to opportunities the ability to contribute small sums of capital to start-ups looking for financing. This form of funding saw a boost in mid-May 2016 after the JOBS Act lifted some restrictions which are explained by the Financial Industry Regulatory Authority here.
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Angel Investors: If you’ve ever watched the show Shark Tank, then you’ve been introduced to the idea of angel investors already. Angel investors are individuals or groups of individuals looking to invest in small businesses with pooled resources and capital. These groups typically have different perspectives and objectives, so finding the right fit can be the most important part of finding access to funds. One of the additional benefits to angel investors can also be gaining access to expertise to help advance your start-up.
- Bank Loans: Taking on debt is, perhaps, the most traditional form of funding, and for some entrepreneurs, is the best form. Because a bank (or other financial entity) has a large base of capital, they can provide liquidity for a start-up looking to grow. Given the high risk and failure rate of start-ups this type of funding can be challenging to secure. Find an institution that understands start-ups is a good place to start and build a relationship. Another source of information and advice is your local Small Business Administration (SBA) office (SBA loan information can be found here).
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Grants: If an entrepreneur can find the right program this can be a good source of start-up funding. One of the major benefits of grant funding is that, unlike the above-listed sources of funding, grants are non-repayable and non-dilutive. One of the most famous agencies that distribute grant money is the Defense Advanced Research Projects Agency. Since 1958, DARPA has provided hundreds of millions of dollars in funding to start-ups working on a project in which the military had become interested. Your business might not align with DARPA’s interests, but there are plenty of other grants from the government and even large private companies operating in your industry. The SBA is also a good source of grant information. If a start-up is women or minority owned company there are many grant programs specifically aimed to assist.
To learn more about the differences between STTR and SBIR funding refer to our blog “Helping our Faculty Navigate the World of SBIRs & STTRs” and also our blogs “STTR Funding for Your Start-up” and “SBIR Funding for Your Start-up.”