Cre8tive Capital wants to ensure startup tech and tech enabled companies are well managed and stable. From our professional experiences with startup companies, we compiled the essential questions that we often see clients struggle with.
Funding a new business is hard. Trying to find funding for your startup from people you don’t know is extremely difficult. However, it is not impossible. There are several ways to get the necessary funding to make your dreams a reality.
Below are funding options listed by most frequently used to the most uncommon:
Savings – this can be from your retirement or another source of savings. This tends to be the most common route for entrepreneurs fund their businesses because it does not require the time and energy to convince someone else to give up their own funds for your idea.
401K loan – There are three ways to use a 401(k) to start a business: Rollover for Business Startups (ROBS), Borrow Against IRA, or Cash Out. What option is the best may vary between different factors such as if you plan to work full-time, have enough assets, if you are a C-Corp, staying with your employer, etc. This option requires weighing the pros and cons between the tax benefits, easy approval, and fees that are associated with these choices.
Bank Loan – The typical rate of a loan from a bank varies between 5% to 15% for Chicago. This is because your business venture is considered risky. Bank loans are usually secured by home not the business. Depending on the amount you are requesting (for example, greater than $50,000), proof of at least $50,000 to $150,000 in annual revenue or income will be required.
Friends and Family – Acquiring loans from your personal network is fairly common. These are individuals who believe in you, so they believe in your idea. Jeff Bezos funded Amazon from a loan he requested from his father.
VC/Angels – Venture Capitalists and Angels are arguably the most difficult funds to acquire. This is because they hear many business pitches and know they have a reputation and quotas to meet. Its worth to note that just because a VC/angel didn’t necessarily say no, does not mean that is a yes. However, keep in mind that a VC/angel does this so they don’t completely lose out on the opportunity in the future in case they suddenly feel confident in investing.
A Success Story
Most startups use their own savings to fund their new company. In 2004, Matt Maloney and Mike Evans were developing a search engine for rental real estate in Chicago. During this time, Matt and Mike noticed there was a need to order food without the hassle of providing a menu, credit card number, and address over the phone. Sensing an opportunity, the website framework for rental real estate was applied to restaurants and Matt and Mike began collecting hundreds of menus around the city.
At first, restaurants paid a premium to be on the website for 6 months. However, this revenue model was not sustainable and changed to allow Grubhub a 10% commission for each order, which restaurants loved. This adjustment allowed this idea to thrive in Chicago and is currently known as Grubhub.
After Grubhub’s success in Chicago, the next step is to expand to different cities. However, Grubhub did not raise any venture capital, and feared waiting for funding would set Grubhub back. So, the founders decided to bootstrap Grubhub to San Francisco. This risky move allowed Grubhub to gain the attention of investors and secure funding one month later.
Now with over 9 million active users and 75,000 restaurant partners, Grubhub is present in 1,100 cities in both the US and UK. Since then, Grubhub has acquired its competitor, Seamless, and Yelp’s Eat24 to grow significantly and have an IPO.
Lessons to Learn
GrubHub’s story is proof that securing funding is not essential for a startup to take off. Use judgement to interpret the time’s value into money when acquiring funds. Additionally, a startup’s revenue model can make or break the business. Therefore, having a strong understanding of the market will dictate the revenue model best fit for the industry, and allow for the business to grow efficiently long-term without sacrificing the appeal to the market.
Expectations vs. Reality
Parking in Chicago is expensive, time consuming, and inconvenient. Not to mention, the stress from parking tickets and towing made riding the CTA more appealing. Mark Lawrence and Jeremy Smith specifically noticed residents in the Wrigleyville neighborhood would rent out their private parking spaces with homemade signs and take cash during the Cubs games.
Mark and Jeremy saw an opportunity to create a system of parking spot listings with guaranteed spaces for buyers. The two both invested $5,000 of their own savings to get started on their peer-to-peer parking marketplace. Once relationships with app developers and designers were established, Spothero was born.
In the beginning, Spothero only served Milwaukee and Chicago. Later, after successfully securing millions in venture capital, Spothero expanded its company size and serves 5 additional cities: Denver, New Orleans, Minneapolis, Philadelphia, and San Francisco.
Currently, Spothero provides affordable parking not just through private parking spots but by partnering with parking garages and parking companies. Spothero has acquired a San Francisco peer-to-peer marketplace called ParkPlease and now is the default option when asked, “find me parking” on google home technology.
It is possible to use personal funding to lead to additional venture capital as proven by Spothero and Grubhub. What made these three companies successful was not the amount of money they were granted in the beginning, it was the execution of these businesses. Changing revenue models, bootstrapping to another city, and never slowing down allowed them to become the scalable companies they are today.