The Pros and Cons of Funders for a Concept-Stage Startup

SIBP-Blog-NEW-B-3When you’re trying to find money for your startup, particularly when the business is still in a conceptual stage, serious investors can be hard to come by. Talk and ideas are cheap, and sophisticated investors want to see a track record, hard numbers and real results. The earlier in the startup process your business is, the harder it is to even get a meeting with a serious investor.

This doesn’t mean you have a lack of options when it comes to raising money. It just means that you need to consider some alternatives, and be aware of their pros and cons. In this post, I’m going to examine five common sources of funding for startups in the earliest stages of development. I’m also going to explore some of the risks associated with each one.

1. Your Significant Other

Unless you’re exceptionally talented at maintaining a strong work/life boundaries, your significant other will be hearing about your business all the time. At the very least, the business will become a factor in their lives because it will already be factor in yours. If they’re going to be living and breathing your business, it can certainly make a lot of sense for them to become a partner in it. They’re going to be along for the ride one way or the other.

Obviously, this isn’t an investor relationship you want to enter into thoughtlessly. Going into business with your significant other carries many of the same risks as taking on friends and family as investors (see below), but the stakes are higher. Asking your romantic partner to invest in your entrepreneurial dream, particularly if they’re doing it at the expense of their own savings or investments, can all too easily result in a big strain on the relationship. If things go badly, you could be looking at everything from nights on the couch to the unexpected costs of a hiring a divorce lawyer, so be careful.

2. Friends and Family

When the people closest to you invest in your startup or company, it generally isn’t because you presented an ironclad case during your pitch. It’s because they love you and believe in you, even if they don’t have a clue what your business model is. If you’re lucky, one or two of them may understand your business enough to offer meaningful feedback, but in general these are not going to be sophisticated investors.

Going into business with friends or relatives is something you really need to give careful thought to. If things go badly — and that can happen all too easily for any startup — those relationships can become strained very quickly. This can mean that Thanksgiving becomes a little awkward, or that you stop getting invited out for drinks with your pals. It can also results in real anger, estranging your family and outright losing those friends. This isn’t to say that it’s always a bad idea — plenty of highly successful businesses started this way — it just means you should be realistic about the risks.

3. Lenders

Countless businesses have launched and thrived thanks to a personal bank loan. It can be a little risky putting your assets up for collateral, but sometimes it’s the option that makes the most sense. The biggest thing to understand about conventional lenders is that they really don’t care about you or your business at all. Their job is sell money at the lowest possible risk.

That’s a totally needed service in the marketplace, but professional lending is not about making friends. A lender may have a highly personal approach, and even express some degree of interest in what you’re doing, but you really can’t mistake that for true support. They’ll still take your house if your soon-to-launch startup fails and you can’t pay back their loan. If you run into trouble and can’t hold up your end of the deal, it’s not in their job description to give you the benefit of the doubt.

4. Angels

The great thing about angel investors is that they care about startups. Yes, they want to make money. When they make an investment, they want to see a return on it. Unlike a lender, however, angels also want to see a specific idea, company or person succeed. It’s not uncommon to see angel groups come together out of a shared purpose, and a passion for entrepreneurism. They can create a powerful network effect for the startups they support, generating a rising tide of businesses who are able to share resources and knowledge.

The downside with angel investors is that they can be a pretty tough crowd. They’re often investing their own money, and they can afford to be highly selective. They aren’t looking for just any business to invest in — like a lender would — they’re looking for the right business to come along and really capture their imaginations. This is particularly tricky for companies in the concept stage of development. If your pitch doesn’t excite them, even if it’s a great business idea, they’ll pass on it.

5. Grantors

Grants are great — it’s free money, after all — but they can be both tricky to come by and tedious to get. To be eligible for a grant, your business has to meet certain criteria. It’s different for every grant, reflecting the priorities and interests of the group or foundation making the grants. If your business is in alignment with their vision and purpose, you may have a good shot at getting the grant.

There’s no guarantee that you will get a grant just because you apply for it. The last thing a grantor wants to see is a business that seems to have been created specifically to get grant money, which can be an additional hazard for startups still in the concept phase.

The best results come from delivering a rock-solid grant application. This can mean a significant investment of time. Every foundation or program is going to have their own set of forms to fill out, and each will have their own approval processes and timelines. Some may even want you to deliver reports on how the money they gave you was spent. The bigger the grant, the more complex the paperwork tends to be. The time you spend chasing a grant is also time you could be spending developing other parts of your business.

The concept-stage startup is hardly one without options. There’s also another, hugely important source of investment to consider in this context: Yourself. Is your business concept good enough that you’re willing to put your own money behind it? Do you see yourself and your idea as a good risk? Would you be impressed by your business pitch? If so, you’re on the right path. The trick is to get everyone else to see your vision, and to chip in on making it a reality.