Crowdfunding, universities and government programs can be attractive options for people who want to start a business without giving up too much equity.
8 min read
Opinions expressed by Entrepreneur contributors are their own.
You’ve got the next billion-dollar idea. Or million dollar, or whatever it is. The point is it’s good, and you want to prove its value. This is the stage where most startups die — which is to say before they even get started. Because the most daunting obstacle to seeding the next big idea is capital.
Most first-time entrepreneurs have heard of venture capitalist firms and angel investors. That’s how Facebook got started, right? So why shouldn’t it be you? The truth is it’s extremely difficult and rare for first timers to receive funding this way. In fact, by some estimates, less than one percent of startups are funded by angel investors and a fraction of one percent by VCs.
Problems finding funding to start a business
When looking for outside funding, many entrepreneurs look to friends and family. But do you really have friends and family that are able and willing to shell out $50,000, $100,000 or more to see if your idea is worthwhile? And getting a loan from the bank is a tedious prospect where you may have to put your house or other personal assets at risk. Not to mention there’s the other problem even if you do get funding: giving up too much of your company too early. You see a big check, give up 50 percent of the company, and end up regretting it for the rest of your life.
These are problems that are unfortunately preventing many good, innovative ideas from ever sprouting beyond the back of a napkin. But what many entrepreneurs don’t know, especially if it’s their first time around, is that there is capital to be had without any strings attached. Here are five ways you can seed your company on the cheap, or even for free:
1. Government grants
Did you know that you can find grant money to fund your startup on the federal, state, regional and even city government level? And they won’t even ask for equity. While what’s offered will vary by geographic location, investing in startups has become an emerging model of how government is enacting economic development. Invest in the next unicorn in the region, and it will create jobs and attract talent to the area.
For example, manufacturing is important to the state of Ohio, wich is why it established the Advanced Manufacturing Program, offering grants of up to $500,000 to promote innovation in manufacturing. Louisiana, a state with a major international port and shipping center, provides grants to small businesses to help increase exports.
These types of focused grants exist in individual states and across industrial sectors, and at both the state and Federal levels. The National Science Foundation, for example, funds about 11,000 proposals a year spanning everything from biosciences to climate-related ventures.
And Louisiana Economic Development’s STEP export program offers reimbursement for small businesses that are either new to exporting or primed for market expansion. Eligible businesses can receive over $6,000 for things like exhibition booth fees, travel, and even business-related meals.
Finally, Connecticut’s Manufacturing Innovation Fund Voucher Program offers grants of up to $50,000 to help pay for new technology, expertise, and prototype development.
However much money you need, and whichever sector you’re in, there’s likely a grant out there that could provide seed money to move your idea forward. And while there will sometimes be certain stipulations you’ll have to meet (for example, extensive reporting and forms to submit), you’ll never have to give up equity or pay back the grant.
You’ve probably heard of Kickstarter or GoFundMe, but maybe they just seemed like cute platforms for artists. Turns out, Kickstarter has seen over $4.3 billion in pledges. If you need seed money, let’s say $20,000 to develop your app, crowdsourcing could be the answer. In exchange, you offer products or services, but you don’t have to give up equity, you don’t have to pay interest and you’ve already developed a community of potential customers.
Some crowdfunding platforms have taken the step of specifically funding startups, while others are simply open to raising money for any purpose. Fundable, founded by former entrepreneurs and focused on raising crowdsourced capital for startups, generated over $80 million in funding commitments in just its first year. And Indiegogo, another platform with entrepreneurs specifically in mind, has raised over $1 billion in funding for over 650,000 projects.
Hey, if crowdfunding was good enough for Oculus, the virtual reality headset maker that was eventually acquired by Facebook, it might work for you, too.
While you might think that accelerators only accept you if you give them equity, that’s not actually true. There are many programs that offer the same intensive coaching and resources that equity-play accelerators do, but minus the whole equity part.
The reSET Impact Accelerator, out of Hartford, Conn., offers a 4-month, intensive program designed to equip entrepreneurs with the skills and resources needed to scale their startups. There is no cost, and no equity is taken. The only catch is you have to live in Hartford.
MassChallenge out of Boston, is a zero-equity, zero-cost accelerator for early-stage companies across multiple sectors. And not only does it cost participants nothing, but MassChallenge also hands out $1 million in cash prizes. Alumni of the program have been able to verify their products, learn critical skills, build important networks, and have gone on to raise over $2.5 billion in funding.
Take a look in your own backyard and you might be surprised at the programs out there that will help you take your idea to proof of concept at little to no cost.
4. Pitch competitions
Since Shark Tank debuted, pitch competitions have sprung up throughout the country with different prize opportunities. And unlike on Shark Tank, many of them don’t result with entrepreneurs having to give up equity or paying back the so-called Mr. Wonderful a bunch of interest. Take the Urban Future Prize Competition out of New York City. Two winners receive a $50,000 cash prize each year, plus automatic entry into an incubator program. While this competition is focused on cleantech, there’s likely one in your sector, too, with prizes ranging from $10,000 up to $1 million in some cases.
On the other side of the country, San Diego Startup Week offers multiple pitch competitions for companies at an idea or seed stages, with cash prizes starting at $1,000. San Diego’s premier startup event also offers pitch workshops so entrepreneurs can hone their chops before taking the stage. Entrepreneur magazine’s Elevator Pitch show offers a wide variety of deal structures for winning pitches.
Universities offer grants and awards for students, faculty, and alumni, as well as offer up resources that startups could otherwise only dream of. It doesn’t matter if you’re a freshman or a tenured professor if you have a connection to a university that could be your ticket to raising the capital you need without the usual drawbacks.
Life sciences have an extremely expensive barrier to entry for startups, but universities offer the research facilities and can match entrepreneurs with researchers to push their ideas forward. The University of South Carolina even offers its own pitch competition, The Proving Ground, where students and alumni can receive up to $17,500 in cash to fund their idea.
But universities are doing more than just giving out prizes for pitches — many of them offer full-fledged startup support. The University of Virginia’s iLab, for example, provides direct grants, mentorship, an incubator, and even co-working spaces. And Yale University’s Office of Cooperative Research has given 18 startups grants of $100,000 each to bridge the gap from early-stage research to the creation of successful biomedical products (which enabled them to leverage an additional $103 million from other funding sources).
Entrepreneurs aren’t wired to think about the government seeding their startup, or to consider receiving no-strings-attached money. Their first instinct is to seek out VCs or angel investors, and when that doesn’t work, to take on debt with big interest payments attached. These economic development tools can be the key to bringing to life that idea you’ve been sitting on for a while. After all, with free money, what is there to lose?
Author: Glendowlyn Thames