Current financing options are broken into three categories:

    1. Small Business or High-Growth
    2. Small Business
    3. High-Growth

 

Small Business or High-Growth Financing Options

Friends and Family

Money from friends and family is usually used to fund the earliest stages of a company, sometimes before you even have a prototype. It can be in the form of a gift, a loan or an equity investment in the business.

Whatever option you choose, everything should be recorded in writing (in many cases, a legal document). Spell out terms and conditions, so there’s no confusion. For example, lenders might assume their financial investment gives them a stake in the company or a voice in daily operations. On the other hand, borrowers may believe that it’s OK to miss the occasional payment since the lender is a friend.

Advantages

  • It’s about love — Friends and family are more likely to be motivated by love than profit. They finance you when other options aren’t available.
  • Greater flexibility — Rates and terms can be lower or more flexible than through other financing channels.

Disadvantages

  • Awkwardness — Money doesn’t get more personal than this, so think carefully about what would happen to the relationship if your business falters and you lose their investment. If you can’t face friends or family members after losing their money, then don’t take it.

How to Get It
It’s always advisable to present a formal business plan when pitching to prospective investors — even friends and relatives. The kitchen table pitch is really about selling yourself. Be frank about the risks and explain what the money will go toward and how it will grow your business.

Government Small Business Grants

The federal government offers some grants for small-business owners, but they’re designated for specific purposes, such as certain research and development projects or for businesses in rural areas. While government grants can’t be used to cover startup costs or day-to-day expenses and most aren’t earmarked specifically for women, they may be a viable option depending on the nature of your startup.

Advantages

  • Free money — Grants do not require repayment. The key is finding which grants you qualify for and then doing the work to apply for the grant.

Disadvantages

  • Restrictive — Government grants are typically designated for specific purposes and have strict eligibility requirements as far as what costs can be covered.
  • Time and effort — Applying for grants is time consuming and the application process rigid. Every “i” needs to be dotted and “t” crossed.
  • Slow decision-making process — It takes weeks or months to find out whether you’ve been approved for a government grant.
  • Highly competitive — Expect a lot of other highly qualified companies to submit some first-rate ideas, too.
  • Strings attached — Grants may be awarded with the contingency that you get matching funds or a loan to supplement the grant. You may be required to submit extra paperwork, such as monthly or quarterly progress reports.

How to Get It

  • Grants.gov — A database of all federally sponsored grants. You can search for small-business grants here — just make sure you filter the results on the left side of the page to view grants specifically for small businesses.
  • Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) — The Small Business Association facilitates two competitive programs that provide grants to small businesses that contribute to federal research and development. Eleven federal agencies, including the departments of Agriculture, Defense, and Health and Human Services, post grant opportunities on their websites. You can search all grant opportunities on the SBIR website.
  • State and local — Because federal small-business grants are limited in number and often are competitive, you may have better luck searching for grants at the state and municipal levels. You’ll have to do your own research to pinpoint specific grant programs in your area, but here are some places to look.
  • Economic development agencies — Every state and many cities have economic development agencies that are focused on promoting a strong local economy. Even if the agency itself doesn’t offer a small-business grant, it will likely be able to point you in the right direction.

Competitions

Competitions are events created for entrepreneurs with new business ideas who need seed funding. You present your idea and the need for investment.

Advantages

  • Free money — Many competitions provide prize money, investment capital or in-kind awards.
  • A time to reflect — Participating in a competition forces you to think critically about every aspect of your company. It’s a chance to refine your business model.
  • Practice makes perfect — You get to perfect your pitch and get feedback from highly experienced people.
  • High-quality advice — Most competitions put forward mentors who offer advice and may open doors to money, customers, vendors and talent.
  • Bragging rights — The honor of winning a competition adds weight to your business’s credentials and exposes you to media and others in the competition’s circle of influence.

Disadvantages

  • Time and effort — Participating in a competition requires a lot of time and effort, and the success rate is typically low.

How to Get It
Here are some of the competitions that are specifically geared toward female founders:

  • Cartier Women’s Initiative — A business plan competition created in 2006 by Cartier, the Women’s Forum, McKinsey & Company and INSEAD business school.
  • Eileen Fisher — Provides grants to innovative, women-owned companies that make a positive social and environmental impact.
  • GirlBoss Foundation — Awards grants to women in the worlds of design, fashion, music and the arts to help fund their own businesses.
  • InnovateHer — A nationwide, SBA-supported business competition for women entrepreneurs who have launched innovative products and services for women.
  • Project Entrepreneur from Rent the Runway and UBS — Gives women access to the tools, training and networks needed to build scalable companies.
  • Tory Burch Foundation Fellows — Provides training and support to help early-stage women entrepreneurs grow and scale their businesses.

Rewards-based Crowdfunding

One of the more intriguing entries in the capital world is rewards-based crowdfunding. Crowdfunding is the practice of funding a business or product venture with many small contributions from a large number of people. This is normally done online.

Advantages

  • The money is debt- and equity-free — You don’t have to pay interest or give up a piece of your company in exchange for funding. However, you do provide backers with a tangible item in exchange for their money. Businesses using rewards-based crowdfunding frequently receive money for a new product before manufacturing it.
  • You gain market insight — Doing a crowdfunding campaign provides feedback from early-adopter customers about product features, communication messages and pricing.
  • Your product is validated — If your campaign is successful, you’ve not only proven to yourself that the market wants your product, but you’ve shown its potential to future funders as well.
  • You engage customers — Early customers are more likely to provide feedback and forgive small imperfections. They are also more likely to tell others about your product.
  • It raises your profile — A crowdfunding campaign can also function as a marketing campaign.

Disadvantages

  • You may not succeed — The odds are not in your favor. The success rate on Kickstarter for many small-business categories is below 30 percent. Indiegogo doesn’t publish its stats.
  • It takes time and effort — Running a successful crowdfunding campaign takes persistence.
  • It takes money — As crowdfunding becomes more popular, it takes more to be successful. For campaigns with large goals, many are turning to professionals for help with marketing and to manage producing and fulfilling the rewards, which adds cost to the project.
  • There are often unanticipated costs — Make sure you create a budget and account for the cost to manufacture and fulfill your rewards. If you’ve chosen a flexible funding model that allows you to accept less than your entire goal amount, determine if you can cover all of your costs even if you don’t raise your entire goal.

How to Do It
Crowdfund by telling a compelling story on a platform like Indiegogo or Kickstarter.

Crowdfunding is the one financing option in which women outperform men. Research finds that women tell more compelling stories (than men) by connecting at an emotional level and that their community is more likely to support them. Because rewards-based crowdfunding gets a lot of buzz, it’s worth considering.

Small Business Financing Options

Loans

Small businesses can borrow money for a period of time and make monthly payments that may or may not include interest depending on the nature of the loan.

Which are best for you? Here is a useful tool that will help you identify lenders based on your credit score, amount you want to borrow, how long you’ve been in business, how long you’ve been profitable, and if you have outstanding invoices.

Advantages

  • Maintain ownership of your business — You are not giving away a piece of your company to people who may want to tell you how to run it.
  • Tax deduction — In many cases, the principal and interest payments on business loans are classified as business expenses and can be deducted from your business income taxes.

Disadvantages

  • Repayment — You have to pay back the principal, most likely with interest.
  • Need for cash flow — You need to have the cash on-hand to pay back the principal and interest on a monthly basis.
  • It can be expensive — If your business fails and you’ve put up collateral (such as your house), you will lose it.

How to Get It
Options are listed from lowest to highest interest rates

  • Kiva — A great choice if you want to raise $10,000 or less. You raise small amounts of money from people you know; the rest comes from the Kiva community of lenders. You pay back the money at no interest over a two-year period of time. Kiva is particularly good for young companies that may have trouble raising money by other means.
  • Radical Generosity — Provides no-interest loans by pooling $1,000 each from local women to support women business owners in their communities.
  • Traditional commercial banks — Have cheaper interest rates than other lending institutes, but their criteria will be the most stringent. Banks want it all — good credit scores, cash flow, collateral and character of the borrower. This option is best if you’ve been in business two-plus years.
  • Community banks and credit unions — Offer a bit more flexibility, and because they’re more likely to know you personally, your character can sometimes compensate for lower credit scores, cash-flow inconsistencies and lower-to-no collateral levels.
  • Community Development Funding Institutions (CDFIs) — Lend money to small businesses, such as women- and minority-owned firms, that commercial banks deem risky. CDFIs support their borrowers with training and technical assistance to ensure their success, making these alternative lenders a long-established social investment option. Some CDFIs will help you (re)build your credit score. Through the Tory Burch Foundation and Upper Manhattan Business Loan Program, small-business owners may qualify for reduced-interest-rate loans.
  • SBA loans — Provided by traditional or community banks, credit unions and CDFIs. The SBA guarantees that these loans will be repaid, thus eliminating some of the risk to the lending partners.
  • Alternative lenders — Typically a more expensive choice, but when you don’t have the best credit score, have uneven cash flow or even a black mark on your personal credit, and/or are a young company, this may be the best route for you. These options include factoring, merchant cash advance and equipment leasing. Companies of all sizes and stages of their business use these options.
  • Online marketplace lenders — Include traditional debt options as well as alternative lenders. They offer speed and convenience. Here is a comparison of some of the most popular online lenders and a comparison of small business lenders.
  • E-marketplaces — Centralize and streamline the application process for loans. By filling out a single application through a marketplace, you can connect with a range of traditional and alternative lenders, letting you choose the best loan for your business. Companies in the space include Biz2Credit, Fundera and Lendio.

Mainstream Crowdfunding

Americans, regardless of wealth, can now invest in private companies through regulation or intrastate crowdfunding (the former is national, the latter, local). The amount of money you can raise and who you raise money from differs in regulation versus intrastate crowdfunding.

Advantages

  • New source of funding — Both regulation or intrastate crowdfunding open a vast new pool of capital to small businesses. These are a real boon for the 99 percent of companies that are unlikely to raise money from venture capitalists.
  • Money from people who want and need your product — Investors are most likely raising money from the people who will be using the product or service.
  • Flexibility — You can raise either debt or equity.

Disadvantages

  • Time, effort and money — Succeeding at this form of fundraising takes time and skill. You will need to spend money on legal fees and perhaps some marketing.
  • Blazing the trail — While these may have some similarities to other forms of crowdfunding, regulation and intrastate crowdfunding are new and the rules of the road are not fully defined. Success will take experimentation.

Regulation Crowdfunding

On April 5, 2012, President Obama signed into law a landmark piece of bipartisan legislation called The JOBS Act. It greatly expanded entrepreneurs’ access to capital, allowing them to go to the crowd and publicly advertise their capital raises. Title II, III and IV directly affect crowdfunding. (We’ll address each in the latter sections of this guide.)

Title III at a glance:

  • Companies can raise up to $1M every 12 months.
  • Investors are limited in what they can invest each year (up to $2,000 or 5 percent of net worth or income if net worth or annual income is less than $100,000; or 10 percent of net worth or annual income (whichever is lesser) if those measures are $100,000 or greater).
  • Offering must be conducted via an SEC-sanctioned intermediary, either a funding portal or a broker/dealer platform.

Here are some initial lessons learned.

High-Growth Financing Options

Equity Financing

Equity financing is a method of financing in which a company issues shares of stock and receives money in return. Investors may earn a dividend, though they are far more likely to realize value from their investment when the company is acquired by another or goes public.

Equity investments can come from:

  • Friends and family
  • Angel investors (offline or through crowdfunding platforms)
  • Venture capitalists (VCs)
  • Private equity firms
  • Online public offering

Having women investment decision makers is particularly important to companies that want to scale big through equity financing. The data shows people are more likely to invest in those who are like them. It’s called homophily. People of the same gender, race or ethnic group tend to associate and bond with each other. Gender is the strongest bond. So the good ol’ boys network isn’t just a saying, it’s a fact.

Angel investing is no longer a man’s game. Unfortunately, that isn’t the case for venture capital. Because the people who will use your product are likely to invest in an online public offering, Title IV holds promise for more women-led companies raising money.

Advantages

  • Less risk — Equity is less risky than taking out a loan because there is nothing to pay back; though if your business fails, you will have to deal with angry investors.
  • No monthly payments — Since you don’t have to funnel profits into loan repayments, you’ll have more cash on hand for expanding the business.
  • Business expertise and connections — Angels and venture capitalists can provide startups with a valuable source of guidance and consultation. They are typically well connected in the business community and make referrals to customers, vendors and employees as well as other potential investors.

Disadvantages

  • Giving up ownership and control of company — Someone else will own a percentage of your company. In the long run, this may prove more costly than the dollar amounts involved in paying back a loan. Since the investors own a share of the company, you may need to consult with them on how you run your business.
  • Time and effort — Finding the right investors can be time-consuming.

Angels

Angel investors are accredited investors whose net worth is greater than $1 million (excluding a primary residence) or whose individual income exceeded $200,000 ($300,000 for couples) for the past two years with the expectation that the income will continue in the current year. These high-wealth individual investors play an important role in launching the future high-growth companies.

Once a man’s game, angel investing has started attracting more and more women — not surprising, since women are making and controlling a larger percentage of wealth these days. They are investing that wealth in each other, underwriting innovative products and services that rev up the economy. Women represented 25 percent of all angel investors in 2015.

As their name suggests, angels seem heaven-sent. They provide money, of course, but they also provide introductions to major customers, key employees and vendors as well as mentoring, strategic advice and additional funding.

Be prepared though. Most angels will likely want you to have a prototype before they invest. There are two ways to reach angels — online and offline, where there has been a greater effort on the part of local angel groups to reach and engage women in their communities.

How to Find Angel Funding
Here are some of the angel groups that either cater to women angel investors or invest in women-led companies:

  • 37 Angels — A community of women investors who invest together.
  • Astia — Provides funding, guidance and leadership to fuel high-potential ventures from women entrepreneurs.
  • Broadway Angels — An all-female group of world-class investors and business executives who share investment deal flow and the due diligence process.
  • Female Funders — Offers online education for aspiring female angel investors and entrepreneurs raising seed capital.
  • Golden Seeds — Gives investors access to investment opportunities in women-led businesses that are vetted, coached and advised by its expert advisor network.
  • Hera Fund — An all-woman angel group in San Diego whose mission is to grow the number of woman angel investors and fund more female entrepreneurs.
  • Pipeline Angels — A network of new and seasoned women investors who invest in women and nonbinary femme social entrepreneurs.
  • Plum Alley — Provides access to investment opportunities in promising women entrepreneurs and gender-diverse teams.
  • WE Capital — A consortium of leading businesswomen in Washington, D.C., investing in the next generation of women entrepreneurs who are changing the world.

Medium published a list of women angel and early-stage tech investors prepared by Mackenzie Burnett of Distributed Systems.

There has also been a greater effort on the part of local angel groups to reach and engage women. The Angel Capital Association can help you identify a local group of angel investors in your area. It pays to attend local pitch and demo days since many angels frequent these. AngelList and TechCrunch are also good resources as they provide information on what some angels have invested in.

Crowdfunding for Accredited Investors

Title II of the JOBS Act went into effect on September 23, 2013. It allows private companies, at any stage, to market their securities offering to accredited investors (wealthy people) via platforms like:

This crowdfunding resource centralizes, streamlines, simplifies and shortens the process of raising money from angel investors. What’s more, it’s the least burdensome in terms of disclosure and financial reporting of the investment crowdfunding options enabled by the JOBS Act. For more on Title II, read:

As an example of how this Title II option works, Portfolia Funds invests your dollars across six to 10 entrepreneurial companies over 12 months, easily providing investors a diversified “portfolia” of young companies. Portfolia has attracted both women investors and women entrepreneurs because of its focus on consumer products, health, productivity, education and the internet of things (IoT).

Venture Capital

Long the bastion of men, venture capital (VC) is an important source of funding for innovative, job-creating companies such as Google, Intel and FedEx. One in five U.S. companies currently traded on the stock exchanges received venture capital financing. These funds are for high-stakes players: less than 1 percent of companies raise money from VCs, and that typically comes after you’ve built the prototype and proven that the market wants your product.

But the VC world is homophily in action, as only 18 percent of North American venture-backed deals went to female founders in 2015, according to Pitchbook. Research by Babson found that one reason for the small percentage of deals going to women entrepreneurs is the small and shrinking percent of women investment decision makers at VC firms.

How to Find Venture Capitalist Funding
Rather than getting sand kicked in their faces, VC women have walked away and are building their own sandboxes. Since 2006, about 150 venture capital firms have been founded by women based on a list compiled by Pitchbook. Venture capital firms with women partners are three times more likely to invest in companies with women CEOs.

VCs investing in women-led firms:

VCs that are female-founded but do not specifically target women-led companies:

Corporate venture capital funds targeting women:

Title IV, also known as Regulation A, allows companies to raise up to $50 million from unaccredited investors. Individual investments are capped at 10 percent of the investor’s annual income or net worth. Since online public offerings are complicated and costly to mount, only a few companies have raised money this way since Title IV went into effect in June 2015.

Crowdfunding platforms such as SeedInvest and StartEngine specialize in this kind of fundraising. This form of financing is for later-stage startups that have already gained significant traction in the market and have the money to cover legal and financial requirements.

Chapter 6.
Build a Winning Team2 min