Here at LAMA, we have thousands of interviews telling individual stories of exciting business and technological innovations. On our platform, we’ve had the pleasure to interview dozens of VC’s, Angel Investors, as well as successful entrepreneurs who have bootstrapped their own companies. Everyone has to start somewhere, so we’ve compiled a brief guide to some of the more important distinctions young start-up Founders may wonder about when it comes to financing their venture.
So you’ve decided to start a company! You feel the entrepreneurial spirit coursing through your veins like a 5 Hour Energy drink, and your mom is calling to check in on you more frequently! Whether it’s you and your best friend in a garage, or a small team connected on Slack, you have to grow to survive. There are pros and cons to each funding source, so it’s important to reflect on your needs not only now, but a year (or five!) down the line.
The pro’s of bootstrapping your business, or not relying on external funding, are huge. You own 100% of the company, you answer to no one but yourself, and most importantly you will have to build a model that works right away. If you are relying on your product from day one (or day three let’s be real) then you’ve already cut away the most costly parts of development and can focus on scaling and growth. Other Start-ups and IPO’s work with a slightly different strategy because their main goal is to become profitable eventually (think Uber). If you are not developing a product or technology but rather offering a service, bootstrap as long as you can until it impedes your growth.
Starting out on your own with the intent to not sell away parts of your fledgeling company, you may need to consider lines of credit. Someone always needs to put the money down and in this case, it is your future self. Whether it’s a business loan, or establishing credit with suppliers (which will come with exclusivity clauses), carefully consider who you become indebted to in your early stages, it will absolutely affect when and if you become self-sustaining.
Accelerators, Incubators and Co-working Spaces, Oh My!
These three terms are not solidly defined in the Start-up Universe and so you must weigh the cost and benefit to basically where you are setting up your network. Where you work has a huge impact on who you know and the ideas you are exposed to. Membership in any one of these entities increases your exposure and opportunities simply by putting you in the same office space as other entrepreneurs and business people. While you may pay a membership fee for a co-working space, incubators (sometimes called start-up hubs) will give you office space in exchange for equity. Incubators are temporary programs (usually 3-4 months) and interested in the earliest stage start-ups. Think of it as Start-up Bootcamp finishing with a demo day and a minimum viable product. Accelerators, working with the same equity for office space scheme, would come after with a more specialized program from pitching and seed-funding. Where does that leave Co-working spaces? These shared spaces may offer a lot of the same workshops, lectures and opportunities as Accelerators but the events won’t be mandatory and they’ll be a weekly yoga or meditation class offering.
Consider your needs in terms of a network. Are you in need of a co-founder? Then a Co-working space or Incubator is a no-brainer for you at this early stage. Are you actively looking for funding? Accelerators will help you pitch and reach investors. If your needs are less concrete then consider where you are co-working and take advantage of what that space has to offer. Attend lectures, meet other founders sharing an outlet with you, go to the weekly yoga class! Your start-up is only as successful as its network so be mindful in meeting your peers, growing your team and vetting investment; in the end, it’s all about people.
Angel Investment and VC Funding
There are key distinctions between Angel Investors and a VC fund. The first obviously is that an Angel will be investing with their own after-tax, investible money while VC funding is managing a fund they’ve raised from limited partners. This simple distinction drives the involvement, motivation and influence these investors will seek in your company. An Angel who has relatively small capital will be looking for early/seed-stage start-ups who have a minimal viable product, with whom they invest not only their money but expertise and time in. Experienced Angels are known to put seed money into multiple enterprises and then follow up in later funding rounds with the “winners” of their initial investments.
Angels often require participation in their investment and VC funds will lack this mentorship aspect Angels often provide. They have one goal and it is usually on a 10-15 year timeline; to generate a return on their funds. So VCs tend to prefer scalable opportunities which have the potential to drive a billion-dollar return. They won’t be scared off by capital intensity, or large capital needs because they have the funds to keep investing through later rounds. Angels tend to be more attracted to more efficient businesses because they cannot fund heavy capital needs and unfunded capital needs represent an extra risk for the Angel. The company might not get funded and die, or they might turn to VCs who have a very different view of the exit strategy as they have a shorter timeline.
In “The Art of Startup Fundraising,” author Alejandro Cremades posits that the bulk of startup investments are made by Angel Investors. These investors are high-asset individuals who invest either for pure profit, or for causes and initiatives they believe in. These investors, according to a 2018 Forbes article, in 2017 Angel Investments reached “nearly $23 billion,” and were “not only responsible for funding over 67,000 start-up ventures annually, but their capital also contributed to job growth by helping to finance 274,800 new jobs.” Angel Investors also have a ton of expertise, mentorship, and network capital to offer the companies they invest in. These high-income individuals most likely come from working on various corporate executive teams and tend to be successful entrepreneurs themselves. Working with an Angel Investor puts you in a perfect position to broaden your investment, partnership, and advisor network.
On the other hand, it’s very important to communicate your needs and how much of the company you’re ready to relinquish to an Angel Investor. If an Angel Investor wants to give you $150,000 for 50 percent of your company (it’s not unheard of), then it’s best to look for other options – even though the money might be tempting. According to Entrepreneur, “Angel investors, like venture capitalists, also like to see an end game down the road that will allow them to pocket their winnings.” While many Angel Investors are simply enthusiastic and experienced entrepreneurs with an interest in new markets, products and innovations, there are always some unscrupulous investors simply looking for a payout later on.
Whatever door you decide to choose on your journey as an entrepreneur, carefully consider each option and whether or not that option is right for you. Many folks don’t have what it takes to commit to their innovations, assess the risk, work tirelessly and market their brainchild; but everyone wants in on the rewards of building a successful start-up. Keep the big picture in mind as you sort through the small details and don’t let pride or fear of losing control stop you from seeking help to grow.
When you’re ready, set up your interview with LAMA. We can’t wait to hear your story!