by Brad Mishlove, CEO and founder of Catapult Groups
The romantic ideal of a successful startup includes little more than a good idea, a laptop and plenty of coffee. In reality, most startups require an early capital infusion to successfully transform from a dream into a business.
The good news is that it’s easier than ever to find capital for your startup. Once you learn about all of your financing options, you could choose the one best suited to help your business grow.
Here are some ways to save money and reduce financial stress as you develop your startup into a full fledged enterprise:
Deciding on an Investment Strategy.
If you are thinking about seeking investors, it’s important to research your options to find the best suited to your startup’s needs. No business owner should enter into an agreement with an investor before learning about the terms they offer and their reputation.
ANGEL INVESTOR: These are individuals who offer capital to startups in exchange for equity, partial ownership or convertible debt. In order to become an angel investor, one must have a net worth of at least $1 million, an annual income of $200,000 and be accredited by the SEC.
Angel investors generally offer favorable terms to the startups they work with since they believe in the potential of its founders. They often provide guidance and coaching, and may even assist with talent recruitment efforts, network on a startup’s behalf, or render other services to help it grow.
SYNDICATES: Syndicates are single-purpose investment funds. Syndicates are comprised of a leader, which is usually an experienced and influential angel investor, along with a number of other investors, or backers, which may not have the same connections or influence as the leader.
Syndicates allow startups to easily access a large amount of capital and to network with other investors.
CROWDFUNDING: In recent years, many startups looking for capital have turned to crowdfunding, which has emerged as a popular alternative to traditional venture capitalist networks. Crowdfunding allows startups to seek out small donations from a large number of people, allowing startups to gauge interest in their product or service before launching.
Crowdfunding also allows startup owners to avoid offering part ownership to outside investors in return for funding. Startup owners can solicit donations or offer rewards to investors while retaining complete control of their company.
What if I Want to Build the Company On My Own?
Some business owners decide to self-finance their startup rather than seek out investors. This strategy, known as bootstrapping, is ideally suited to businesses which don’t need a large influx of capital early on in order to finance growth and which are already generating revenues.
Bootstrapping has a number of advantages compared to other fundraising strategies. By self-financing, you can maintain control of your startup. You can also focus more on developing your business.
That is, improving products or services rather than spend time and resources on a search for investors. You can also avoid overspending on unnecessary projects, which may be easier to do with too much money.
However, bootstrapping often means that your personal finances will be tied to the fate of your startup. Your business also might not grow as fast as it would if it had more capital. The good news is that your business can move back and forth between bootstrapping as necessary.
Understand the Tax Code.
Your startup may be able to claim a number of tax deductions, but you’ll have to know about different categories, considerations and restrictions which may apply to them. Taking advantage of these can help you save money and find a little extra capital to help grow your business.
- Within the IRS tax code, Section 179 allows businesses to file up to $500,000 in tax deductions from up to $2 million in working capital or off-the-shelf software purchases.Instead of waiting to deduct capital expenses due to depreciation over a period of years, small businesses can deduct the full cost of their capital purchases immediately.
- Section 162 allows startups to deduct what are known as investigatory expenses and preopening costs. Investigatory expenses include any expenditures you had to make when researching the feasibility of your startup.Pre-Opening costs refer to expenses your business incurs after it is established but prior to beginning active operations. This can include wages for employee training, marketing expenses, travel costs and more.
According to recent report by the Statistic Brain Research Institute, 25% of startups fail in their first year. While there are numerous causes for this, the inability of owners to obtain or properly deploy capital accounted for nearly 30% of failures, while their lack of knowledge of financing played a role in another 46% of failures.
Knowing how to access and use capital is vital to the long-term success of your startup.
Brad Mishlove serves as CEO and founder of Catapult Groups, a business coaching organization committed to inspiring business owners and keeping them accountable for their own success through peer advisory groups and one-on-one executive coaching.