Financing Options for Small Businesses: Crash Course Entrepreneurship #16

Summary

In this Crash Course Business video, Anna Akana explores the challenges of funding a startup, emphasizing the importance of the 'Three Fs' - Friends, Family, and Fools - as initial supporters. She discusses various funding options, including crowdfunding, bank loans, angel investors, venture capitalists, accelerators/incubators, equity crowdfunding, and grants. Each method has its pros and cons, such as maintaining ownership versus giving up equity or dealing with strict regulations. The video provides practical advice for entrepreneurs seeking to fund their dreams.

Takeaways

• 💼 Launching a business like Ghost and Stars required an initial investment of $10,000, which the founder didn't have readily available.
• 💰 The founder had to save up through side-hustles or find an investor to fund the business idea.
• 👨‍👩‍👧‍👦 The 'Three Fs' (Friends, Family, and Fools) are often the first source of funding for entrepreneurs, investing $60 billion in 2014.
• 🤝 These early investors typically believe in the entrepreneur with the least amount of evidence and are more likely to support at the idea stage.
• 🚫 The downside of involving friends and family is the risk of failure, which could strain relationships.
• 📈 Entrepreneurs should be transparent about the risks and not ask for more money than an investor could afford to lose.
• 📝 When asking for funding, it's recommended to specify the amount needed for a clear goal, show commitment, communicate the plan and risks, and consult an attorney.
• 🌐 Non-equity crowdfunding platforms like Kickstarter allow entrepreneurs to raise funds from the public in exchange for perks.
• 🏦 Traditional bank loans can be an option, but they often require proof of concept or financial performance, making them difficult for new entrepreneurs.
• 💹 Investment-based financing involves selling parts of the company to investors like angel investors or venture capitalists, who provide significant capital and expertise.
• 🏆 Accelerators and incubators offer mentorship and resources to help startups grow quickly, often in exchange for equity.
• 🏛 Grants provide funding without requiring repayment or ownership, but they can be competitive and come with strict guidelines.

Q & A

What are the 'Three Fs' mentioned in the video for early-stage funding?

The 'Three Fs' refer to Friends, Family, and Fools. These are often the first investors for an entrepreneur, as they are more likely to believe in the entrepreneur's vision with little evidence to support the business plan.

Why might the 'Three Fs' be willing to invest when seasoned professionals are not?

Unlike banks or venture capitalists, who require 'proof of concept' and 'financial performance,' the 'Three Fs' are more likely to invest because they believe in the entrepreneur personally, often without needing substantial evidence of success.

What are the potential risks of accepting funding from friends and family?

The risk is that if the business fails, it could strain personal relationships. Entrepreneurs need to be honest about the risks involved and avoid asking for more money than someone can afford to lose.

What is crowdfunding, and how does it benefit entrepreneurs?

Crowdfunding involves raising small amounts of money from a large number of people, typically via platforms like Kickstarter, IndieGoGo, or GoFundMe. It allows entrepreneurs to test the market, validate their ideas, build a customer network, and retain full ownership of their company.

What are some disadvantages of crowdfunding?

Running a successful crowdfunding campaign requires significant effort. Entrepreneurs must carefully research platforms, avoid over-promising on rewards, and on some platforms, such as Kickstarter, they might receive no funds if the campaign goal isn't fully met.

Why are traditional bank loans not typically the first choice for entrepreneurs?

Banks usually require assets, proof of stable revenue, and evidence that the borrower can repay the loan. For new entrepreneurs who may lack these things, securing a bank loan can be challenging.

What is the role of angel investors in entrepreneurship?

Angel investors are wealthy individuals who invest in small businesses or startups at an early stage. They typically invest less than $100,000 and are more hands-on, providing guidance as well as funding.

How do venture capitalists differ from angel investors?

Venture capitalists (VCs) typically represent groups of investors and tend to invest larger sums of money than angel investors. VCs follow a high-risk, high-reward approach, expecting a significant return on investment, but they also require entrepreneurs to give up more ownership and control.

What are accelerators, and how do they benefit startups?

Accelerators, like Techstars and Y-Combinator, are programs designed to speed up the growth of startups. They provide mentorship, customer acquisition support, and often funding. However, participating in an accelerator typically requires giving up some ownership.

What is equity crowdfunding, and how does it differ from traditional crowdfunding?

Equity crowdfunding allows people to invest in a business in exchange for partial ownership, instead of receiving a product or reward. It can be useful for reaching a broader audience, especially in areas where traditional venture capitalists may be scarce.

Outlines

00:00

💼 Funding a Business: The Three Fs

The script discusses the challenges of launching a business, exemplified by the story of Anna Akana's apparel line, Ghost and Stars. It emphasizes the necessity of funding beyond just enthusiasm and product quality. The Three Fs (Friends, Family, and Fools) are introduced as potential sources of initial funding. These individuals are willing to invest based on trust and belief in the entrepreneur, often providing seed money for prototypes or early-stage development. The script highlights that while this method allows entrepreneurs to retain ownership, it comes with the risk of involving loved ones in potential failure. It also provides a scenario with Ryan, who seeks to start a mobile book business and turns to friends for funding, emphasizing the importance of clear communication, commitment, and legal structuring in such deals.

05:02

🌐 Crowdfunding and Traditional Loans

This section delves into alternative funding methods such as crowdfunding platforms like Kickstarter and IndieGoGo, which allow entrepreneurs to present their ideas to a broad audience and offer rewards in exchange for funding. The script points out the benefits of crowdfunding, including immediate customer feedback and network building, while also noting the hard work and potential risks involved. It also discusses traditional bank loans, suggesting that building a relationship with a loan officer early can be advantageous. The challenges of securing a bank loan as a new entrepreneur are acknowledged, along with the need for a solid business plan and financial data. The paragraph concludes with a mention of microloan lenders and the importance of understanding the terms and potential consequences of each funding option.

10:03

🤝 Equity Financing and Grants

The final paragraph explores equity financing, including angel investors and venture capitalists, who provide significant capital in exchange for partial ownership and decision-making rights. It outlines the benefits of this approach, such as access to expertise and large upfront investments, against the drawbacks of reduced ownership and control. The script also introduces accelerators and incubators, which offer mentorship and resources but may also require equity. Equity crowdfunding is presented as a way to involve smaller investors, with the trade-off of partial ownership. Lastly, grants are discussed as a funding source that does not require repayment or ownership relinquishment but can come with strict guidelines and reporting requirements. The script concludes by emphasizing the importance of choosing the right funding path based on personal connections and business needs.

Keywords

💡Apparel Line

An apparel line refers to a collection of clothing items designed and produced under a specific brand or label. In the context of the video, 'Ghost and Stars' is the name of the apparel line that the speaker launched, which required significant initial investment.

💡Side-Hustles

Side-hustles are additional jobs or ventures that an individual engages in alongside their primary occupation to earn extra income. In the video, the speaker had to save money through side-hustles to fund the launch of their apparel line.

💡Investor

An investor is a person or entity that provides capital for a business, often in exchange for equity, debt, or other forms of return. The video discusses seeking investors as a means of funding a business venture.

💡Three Fs

The Three Fs is a term used in entrepreneurship to describe the first sources of funding for many startups: Friends, Family, and Fools. The video explains that these individuals often invest in businesses with less evidence than professional investors.

💡Crowdfunding

Crowdfunding is the practice of raising small amounts of capital from a large number of people, typically via the internet. The video mentions platforms like Kickstarter and IndieGoGo, where entrepreneurs can post their ideas and set funding goals.

💡Angel Investors

Angel investors are high-net-worth individuals who provide capital to startups in exchange for ownership equity or convertible debt. The video discusses angel investors as a potential source of funding for entrepreneurs.

💡Venture Capitalists

Venture capitalists are professionals who invest in startups and small businesses with high growth potential in exchange for equity. The video notes that venture capitalists often take a 'high risk, high reward' approach.

💡Equity Crowdfunding

Equity crowdfunding involves raising capital from the public where investors receive equity or shares in the company. The video highlights this as a way to find investors who believe in the business, even if they cannot afford to be traditional angel investors.

💡Accelerators/Incubators

Accelerators and incubators are programs designed to help startups grow and succeed by providing mentorship, resources, and sometimes funding. The video mentions Techstars and Y-Combinator as examples of such programs.

💡Grants

Grants are funds provided by governments, foundations, or corporations to support specific projects or initiatives. The video explains that grants do not require repayment and do not result in the loss of ownership, but they can be difficult to obtain and often come with strict guidelines.

💡Bank Loans

Bank loans are forms of debt financing provided by banks to individuals or businesses. In the video, it is mentioned that banks may not be the first choice for entrepreneurs due to the difficulty in obtaining loans without substantial assets or proof of stable revenue.

Highlights

Launching an apparel line, Ghost and Stars, required an initial investment of $10,000.

The necessity of saving up through side-hustles or seeking investors to fund entrepreneurial ventures.

The importance of bravery in putting designs out into the world for people to enjoy.

Finding the right investor is crucial due to the different pluses and drawbacks each type offers.

Crash Course Business: Entrepreneurship discusses the non-linear journey of entrepreneurship.

Funding can be sought at various stages of building a business, not just for market launch.

The Three Fs (Friends, Family, and Fools) are often the first source of funding for entrepreneurs.

In 2014, the Three Fs invested $60 billion in budding entrepreneurs, surpassing angel investments.

Professional investors like banks and venture capitalists require more evidence of a business's potential.

The Three Fs are more likely to support early-stage ideas with smaller amounts of funding.

The risk of involving friends and family in funding is the potential to harm relationships if the venture fails.

Advantages of the Three Fs include maintaining company ownership and shared success.

A Thought Bubble example illustrates how to make a funding ask, using Ryan's Library on the Loose idea.

Tips for entrepreneurs when asking for funding include being specific, showing commitment, communicating risks, and structuring deals with legal advice.

Crowdfunding platforms like Kickstarter and IndieGoGo allow entrepreneurs to raise funds from the public.

Crowdfunding offers the benefits of funding, validation, and building a customer network.

Running a successful crowdfunding campaign requires extensive work and strategic planning.

Bank loans can be an option for funding, despite the challenges faced by new entrepreneurs.

Building a relationship with a business loan officer early can be beneficial for future funding needs.

Investment-based financing involves selling parts of the company to shareholders in exchange for capital.

Angel investors and venture capitalists provide large upfront investments and expertise but require equity in return.

Accelerators and incubators offer growth acceleration, mentorship, and funding but may require equity.

Equity crowdfunding allows the public to invest in return for ownership, democratizing investment opportunities.

Grants provide funding without requiring repayment or ownership but can come with strict guidelines and reporting requirements.

The conclusion emphasizes the complexity of startup financing and the importance of following connections.

Transcripts

It took $10,000 to launch my apparel line, Ghost and Stars.

I don’t know about you, but when I was just starting out, I didn’t have that kind of

cash just lying around.

Enthusiasm and super soft cat sweaters are great, but they just don’t pay the bills,

ya know?

I needed to save up money through my other side-hustles, or I needed an investor -- someone

who believed in me and my idea enough to give me money in exchange for (potentially) more

money in the future.

And if I hadn’t been brave enough, I wouldn’t get to put my designs out into the world for

people to enjoy.

But now it’s your turn.

So let’s find the right investor for you, because each has its pluses and drawbacks,

and it’s time to fund your dreams.

I’m Anna Akana, and this is Crash Course Business: Entrepreneurship.

[Theme Music Plays]

This episode is near the end of this series, but entrepreneurship isn’t a linear journey.

You might need funding to accomplish any of the steps to build a business, not just when

you’re ready to take a product or service to market.

Some people look for money for their minimum viable product.

Some market their product or service once everything is set up.

And if you believe Silicon Valley legends, a few people get funding with just an idea.

But where should we look?

Start with the Three Fs: Friends, Family, and Fools.

And calling them fools sounds kind of mean, but we’re NOT trying to trick anyone -- this

is just part of the quirky entrepreneurial jargon.

These people are often the first stop for an entrepreneur, because they believe in us

the most with the least amount of evidence.

According to the crowdfunding site Fundable, the three Fs invested 60 billion dollars -- three

times as much as angel investors -- in budding entrepreneurs in 2014.

That’s right.

Billion.

With a B.

More seasoned investment pros -- like banks or venture capitalists -- will get bogged

down with “proof of concept,” “financial performance”, or needing it “to be more

than a stick figure sketch on a notepad.”

But the three Fs are more likely to be team us.

A lot of this early-stage money is in small amounts to help create a prototype, get design

software, or travel to meet with a prospective partner.

These moves can open a lot of doors, but they might not interest professional investors.

The disadvantage of asking everyone you know for money is that you might fail, and then

you’ve brought someone close down with you.

If you take this path, be honest about the risks involved, and don’t ask for more than

someone could lose.

The main advantage is that you typically get to keep ownership of your company, and your

success is their success too.

And if grandma does drive a hard bargain, at least the business is in the family.

Let’s go to the Thought Bubble to see how we might actually make a funding ask.

Ryan has so many books that he’s started storing them in plastic tubs.

His taste is renowned, his online review blog has a pretty big following, and all his friends

ask for recommendations.

Ryan also loves travel.

So to combine his loves, he’s struck with inspiration to start Library on the Loose

-- basically a food truck but for books.

He knows he can use his massive collection as inventory, and he can probably work with

a local bookstore to sell some of their new titles.

But buying a truck would be too expensive for him right now, so he wonders whether some

close friends would help.

Ryan’s super nervous, so he’s going to use four tips that entrepreneurs recommend:

One, ask for a specific amount of money for a specific goal.

Two, let people see your investment and commitment.

Three, communicate the plan and identify risks upfront.

And four, talk with an attorney to structure the deal.

So Ryan combs through the internet and finds the perfect truck -- a 2006 Freightliner step

van -- for $15,000.

He then asks his four closest friends to meet him for coffee and warns them he has a business

proposal.

Ryan opens by telling them his dream of Library on the Loose and shows them the picture of

the truck online.

He mentions his booming review blog and how he’s successfully sold some of his collection

from a mobile bike bookstand.

Then, he makes the ask and proposes that they all put in $3000 to buy the truck.

It’s a risk, but in exchange, he’ll be transparent about his accounting, pay them

back over 3 years, and everyone gets free book suggestions for life, which he’ll have

his lawyer acquaintance Kim put down in writing.

The decision is up to his friends’ now, but everyone seems excited to be included.

Thanks, Thought Bubble!

Those four tips can apply to any entrepreneur asking anyone for funding, although the Three

Fs are a common starting place.

But maybe family and friends aren’t an option, or we want to cast a wider net!

Non-equity investment crowdfunding platforms let us pose an idea to the internet.

Crowdfunding is pretty simple and involves platforms like Kickstarter, IndieGoGo, or

GoFundMe.

We can create a post with info about the product or service we’d like to make, and then set

a funding goal and a time limit.

Anyone who gives money will be sent a perk.

For instance, if you’re trying to fund a new multi-sensory meditation pillow, backers

might be sent a guided meditation if they pledge $25, or maybe an early version of the

pillow if they pledge over $50.

Sounds awesome, right?

You get funding, validation testing, and a customer network all in one.

And a big plus is that crowdfunding lets you keep total ownership of your company.

But it’s a lot of work to run a successful campaign, starting with researching the platform

you like the most.

Maybe some platforms have higher success rates or tend to feature products like yours.

A quick search through past campaigns can reveal how many reached their funding goals

or help you think about why some products failed -- like, the idea might’ve been half-baked.

And just like paying attention to competing businesses, we want to pay attention to what

other crowdfunding entrepreneurs offer as rewards.

We may be able to offer something unique, but don’t fall into the trap of over-promising

and under-delivering.

A customized all-in-one house cleaning robot could take YEARS to manufacture, while a sticker

with your logo would be just fine.

Plus, on some sites, you could still end up with $0 if you don’t hit your goal.

Kickstarter, for instance, requires a project to be 100% funded before any money is paid

out.

To avoid taking money directly from people, a traditional bank loan might be an option

-- although banks aren’t usually the first stop for entrepreneurs.

It can be difficult to get a bank loan when we don’t have many assets or proof of stable

revenue over time.

Banks like to know we’ll pay them back!

And we’re just not there yet as a new entrepreneur.

So start building a relationship with a business loan officer when you open your business bank

account.

Take time to go into a branch and let them know what you’re up to.

Developing this relationship can pay off in the future when you want to take out a loan

or a line of credit, or even when times get a bit tough and you need advances on payroll

or deadlines extended.

It never hurts to have more people in our corner.

To pursue a loan, remember to check what the bank likes to see from a business plan.

You’ll definitely need financial data, but they may be satisfied with a succinct 5-8

pages on the rest of the business if you tell a good story.

A formal loan can be hard to get and comes with a formal schedule to pay it back.

And if you can’t pay, they make take something else you own, like your car.

But your success -- or failure -- is all your own!

Many non-US countries also have lenders that focus on microloans and helping community

members get ventures off the ground, but we can’t get into the nitty-gritty here.

If we’re okay not having complete ownership, investment-based financing involves selling

a piece of the company to interested people who become shareholders and partially own

it.

This path often begins with an angel investor, or someone with a high net-worth and an interest

in helping small businesses and entrepreneurs.

They usually like to be hands-on with early-stage entrepreneurial ideas, and invest less than

$100,000.

The typical venture capitalist is an investor or firm representing several investors that

focuses on startup companies.

They often take a “high risk, high reward” approach and invest much more money than an

angel investor, hoping to get more profit down the road.

The advantages of turning to investors is the ton of cash upfront, and the expertise

from people who have already done what you’re trying to do.

But on the flipside, investors expect a lot in exchange for so much money.

The more investment capital you get, the less ownership (like profits and voting rights

to make decisions) you hold onto.

There’s also a lot of business-y buzz around accelerators or incubators, which are programs

designed to accelerate the growth of a company so it becomes more profitable faster.

Techstars, Y-Combinator, and Boomtown are accelerators behind some of the biggest startup

success stories.

They usually come with mentors, paths to fast customer discovery and acquisition, and are

often venture capitalists in disguise --

which isn’t a problem, just something to be aware of, because of similar disadvantages.

You may have to give up some ownership to get involved with these perks.

And if you don’t know where to find investors but you’re still willing to give up ownership,

there’s also a crowdfunding approach called equity crowdfunding.

This allows anyone to pledge funds, but instead of receiving rewards, they receive slices

of ownership.

This has been a game-changer in places like rural America where venture capitalists are

scarce, but communities are strong.

An advantage of equity crowdfunding is finding people who really believe in your business.

People who don’t have the money to be a traditional angel investor can help within

their budget.

And, like traditional crowdfunding, you can take it to the internet to find more potential

investors.

However, the average successful equity crowdfunding campaign only raises $7,000, and you have

to give up partial ownership.

Also, there are some serious regulations around equity crowdfunding that vary state by state.

Finally, grants are given by companies, foundations, and federal or state governments looking to

support businesses and spur economic development.

On the plus side, you get money without having to repay anything or hand over ownership.

In the US, check grants.gov for federal opportunities, your state’s department of commerce for

state opportunities, and your city's economic development agencies or tourism board for

local opportunities.

But on the negative side, grants are tough to get because they’re usually only allowed

to fund specific things.

There are also often strict reporting and measurement guidelines that come with the

money, and fulfilling these obligations can take away from your focus on key activities

or plans for strategic growth.

The bottom line is: financing a startup can be tricky.

Go where your connections lead you -- whether that be friends, angel investors, bankers,

or yes, the internet.

Next time, we’ll wrap things up by talking about growth and whether it’s always a good

thing.

Thanks for watching Crash Course Business, which is sponsored by Google.

And thanks to Thought Cafe for these beautiful graphics.

If you want to help keep Crash Course free for everybody, forever, you can join our community

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And if you want to learn more about negotiation with people, check out tips from Crash Course

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