Most entrepreneurs believe their business is built on a strong foundation of passion, hard work and ingenuity. But creating a successful company always involves another critical ingredient: money. According to a recent Gallup poll, 77 percent of small businesses rely on the personal savings of their founders for initial capital needs.
But scaling your business often requires you to do something that makes many people squirm: ask for money.
The truth is, you can only work out of your garage or home office for so long. An infusion of capital allows you make big changes that can take your company to the next level. And fundraising is crucial for businesses that want to scale; the money allows you to hire more staff, expand your workspace, run marketing campaigns, do better product development, grow your line and much more.
Personally, I’ve used a few different forms of funding over the course of my entrepreneurial journey, and I’d like to think this diversity has helped me build my healthful beverage brand, hint, into a multimillion-dollar business.
Here are a few of my best practices to help you determine what types of fundraising are right for your startup.
1. Make sure your idea is viable before seeking outside funding.
Hint was born back in the early 2000s to solve a personal problem. After years working the grind as an e-commerce executive at AOL, I was exhausted and overweight, and I had developed adult acne. In addition to eating better and exercising more to get healthy, I traded the eight to 10 cans of diet soda I was drinking every day for water. The only problem? I hated the taste of plain water. To make myself drink more, I added fruit oil to my water for a “hint” of flavor. And it did the trick: I lost 45 pounds in three months, cleared up my skin and felt energetic in a way I hadn’t in years.
I saw a gap in the beverage industry for a product similar to what I was making at home: water, only tastier, with no sugar, sweeteners, calories or preservatives. I knew the product worked for me, but I wanted to make sure it was viable business before taking any outside funding. So my husband and I started lean and bootstrapped. Then, after a couple years, we felt confident that hint was gaining momentum: We were stocked at retailers like Whole Foods Markets, and we were hearing incredible feedback from people drinking our water. Friends and family began asking if they could invest, so we decided it was time to fundraise. Fun fact: Many of our investors are women; more than 70 percent of our cap table is female.
2. Determine the type of investment that works for your business and growth plan.
Generally, utilizing multiple sources of financing will help you grow and expand faster. But every startup is a snowflake: It’s important to evaluate whether that makes sense for you. Do you want to rapidly scale your business? Stick to your niche? Diversify your product?
Your options can run the gamut: As we did with hint, raising funds from friends and family is often a great start. Online fundraising platforms, which include peer-to-peer, such as Funding Circle and donation-based sites, like Kickstarter, can be useful for garnering attention for your product.
Venture Capital firms generally invest against equity—looking for major return—and exit when there’s an IPO or acquisition. This type of funding can be perfect for those looking to hustle and get out within three to five years, but if you have a product that will take longer to get to market, or if you’re looking to retain a lot of control over your business and not compromise much, VC funding may not be right for you.
Angel investors, meanwhile, are often more willing than VC firms to fund small businesses, and they may be more flexible with their terms. Typically, this type of investment happens in the earlier stages of a company’s growth, and angels are known to take risks that other investors won’t.
Investment from family offices, which has become more popular in recent years, is somewhat harder to define than other forms of funding. However, family offices usually engage in wealth management, overseeing things like investment and tax, philanthropic and estate planning. Because raising money from VC firms is highly competitive, a family office can be a real asset for a younger brand looking to get off the ground.
Incubators and accelerator programs, such as Y Combinator, provide seed money to the early stage startups accepted into their programs, and offer incredible access to many types of investors. There are also bank loans, business loans from microfinance providers, government programs that offer startup capital and more to consider.
Bottom line: Stay open to what works for you during the different stages of your startup journey and be open to different types of funding to meet your changing needs. A common saying that I subscribe to is, “Don’t be afraid to build the plane while you’re flying it.”
3. Only accept funding from investors who are your #1 fans.
After our raise from friends and family, we decided that angel investment and a family office were the right funding opportunities for growing hint. But, first and foremost, one of our biggest criteria was that anyone providing capital had to actually like the brand—and drink it regularly.
Our financiers need to be passionate about hint’s overall goal to help people live healthier lifestyles and promote wellness for American consumers. We want to run a company that incorporates our core values into every decision, including investment.
Many of our investors are people who reached out to us and said, “Your water changed my life!” One of our funders who I get asked about the most is the acclaimed singer-songwriter and pianist John Legend. In fact, he was the one who reached out to us because he loved our water—he drinks it onstage when he performs—and felt it complemented his lifestyle. When it comes to growing your business or getting it off the ground, angel investors can be some of the most critical people you’ll ever meet. Because they’re individuals, the relationship you develop is often based more on shared values and passions than ROI. They’re investing in you as well as your company.
No matter what type of investment you seek, though, I believe it’s crucial to choose investors who align with your values. It works both ways: When you’re passionate about your product, you’re more likely to attract investment, according to a 2018 study published in the Journal of Business Venturing. The report found that VCs and angel investors value entrepreneurs’ passion for the sphere related to their products and for entrepreneurship, and that openness to feedback elevates the appeal.