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When building a venture, it's important to understanding all of the different financing options that exist for you. This section will introduce you to the core methods for financing a venture, provide you with the pros and cons of each, and give you a small deep-dive into venture capital, for those of you pursuing a high-growth startup.
When building a venture, it can seem like there are stages when you absolutely can't move forward unless you get external capital. Oftentimes, this isn't true - being a successful entrepreneur is all about building what you can with limited resources.
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Here's the truth: it is not easy to finance an early-stage startup. Funding for idea-stage ventures is hard to come by, because so often these ventures are untested and risky.
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Being a student modifies this dynamic in unique ways. On one hand, student-founded ventures are typically more risky, because the founders are also inexperienced (not a bad thing!) However, there is a large amount of money out there for student entrepreneurs, offered either by their own institutions or national competitions.
Take advantage of being a student, because as soon as you graduate, you are forced into the real world, where idea-stage funding is practically non-existent unless you have a track record of successful ventures behind you.
Before we continue, there are a few important points to clarify about fundraising:
Not all ventures need to raise outside capital
It is absolutely a myth that most startups need to raise outside capital. In fact, only .05% of startups raise venture capital, and 34% are entirely bootstrapped. If you build a true business - selling a product that solves a real need for customers who will give you money for it — you may not have to raise any outside capital at all.
While raising outside capital has it's benefits, it also has some very serious tradeoffs: loss of control, acquisition of debt, and massive amounts of time spent pursuing capital from investors, instead of pursuing capital from customers. More and more founders are choosing to eschew traditional capital sources, or outside financing all together, so they can maintain full control over the trajectory and mission of their business.
Founder contributions are important, albeit inequitable
A founder's contribution is essentially the money that the founders put into the venture. Often, personal contributions are valuable for a few reasons: they provide capital at a time when outside investors wouldn't be interested (the earliest stages), and they demonstrate commitment on behalf of the entrepreneur.
But obviously, the ability to make a founder's contribution depends on your economic circumstance. For those who do not have disposable income, personal contributions can be a barrier to starting a company, which is why its often considered inequitable to require a founder to invest their own money. Unfortunately, some people will consider a founder undedicated if they do not personally contribute
Despite this deep flaw, founder contributions are common, and in many cases, unavoidable. If you have it, you will likely need to invest your personal money into any venture that you build at the earliest stages - and to be frank, you should. If you have money to spare but you refuse to invest it in your own business, you might want to ask yourself why.
Capital requirements vary based on your venture type
High-growth startups typically require outside investment to be successful, because even if you are profitable with selling your products, you need to spend much more money than you bring in on growth. Small businesses, on the other hand, can typically get off the ground with less money, because you only grow when you have enough profit saved up to do so.
It also depends on your type of product - if you're building software, you can build it for practically free. If you want to develop a medical device, however, you are going to likely need hundreds of thousands of dollars to prototype and test it. In these cases, you'll more than likely need to raise outside capital.
When you are venture-building, be careful who you ask for fundraising advice. If many of your mentors are from the high-growth path, you are only going to get advice applicable to high-growth fundraising, which might not be the best option for your venture. This isn't their fault - it's just what they know. So when it comes time to raise capital, seek advice from other founders who have raised a variety of different types of funding (or, none at all).
At the end of the day, raising money will distract you from building your business. For that reason, the decision to actually raise money should not be taken lightly, and you should only do it when you absolutely must.
Before you decide that you can't do any more work until you raise outside financing, ask yourself these questions: