Funding Sources
Starting a new small company requires an investment of cash, as well as time and energy. And, since the long-term success of a new business is no sure thing, typical sources of funding, such as a bank, are seldom available.
Possible Funding sources
Small start-up companies are often financed with a combination of the following funding sources, with different sources more likely to be available at different stages of the new company's life cycle. Note: the list of sources is an historical observation, and is neither a recommendation nor a comment on the appropriateness of any of the sources for a particular start-up.
- Personal funds: do not need approval from others, but limited in magnitude
- Friends and family: characteristics similar to personal funds, but a greater number of sources
- Angle investors: often require an introduction by a trusted intermediary. Will typically require a well developed business plan, written or not, a set of projected financial statements supported by reasonable and explicit assumptions, and a clear path to high return (5x to 7x) in a 3-5 years via a well-defined exit strategy. Investments might range from $10,000 to perhaps $100,000, provided in stages and based on accomplished milestones. Tucson has an active angel investor community, including the Desert Angels.
- Venture capital investors: same requirements as angle investors, plus will typically favor a highly experienced management team, at least some initial revenue into the company, a large projected national or global market for all competitors combined (e.g. over $1B/year), and a possibility for achieving a first or second rank among competitors in the field. Investments might range from $100,000 to perhaps $500,000, in stages. Tucson is home to several venture capital firms.
- Profits from the enterprise (self-funding): maintains greatest control among the founders, but as a sole source of funding often leads to slower growth than would be possible with external funding, and thus a lower absolute return to the founders
- Banks: typically not available in early stages of a start-up company, but might become available as the enterprise becomes more secure
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Last modified: June 27, 2008.
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