Two Alternatives for Funding a New Business

Last month, I blogged about startups following the “traditional” tech path to obtaining capital for their businesses by seeking investors. In this post, I discuss two alternative (and far more common) methods of funding a new business venture, without venture capital.

1. Grow Slow. As this New York Times article discussing the success of the email marketing company Mailchimp notes, tech companies don’t have to use outside investors to grow big – and they don’t have to grow fast to succeed. Mailchimp started small and grew slowly, like many small businesses outside the tech sector. Following this more traditional model, many businesses may seek capital through vehicles such as a U.S. Small Business Association (SBA) loan.
2. D.I.Y. It’s also possible to start a business on your own dime – or that of your family. A recent New Yorker article profiles Yvon Chouniard, founder of the clothing company Patagonia. By contrast with the short lifespans of most Silicon Valley startups, Patagonia was founded decades ago as a climbing gear manufacturer.  But, like many a modern startup, it was founded on an idea that there was a problem (here, inadequate traditional climbing gear) that could be made better. A self-taught blacksmith, Chouniard borrowed $825 from his parents to buy specialized tools to fabricate climbing equipment he believed to be superior to any of the gear available at the time. He ran his business from his parents’ backyard or the trunk of his car.

A company started in this manner may choose to be a single-member limited liability company, or even a sole proprietorship. Instead of being beholden to investors or pressured to turn a sufficient profit to make payments on a small business loan, founders of companies who follow the DIY model have freedom to be a bit more idiosyncratic. However, borrowing funds from friends and family is rife with its own set of problems, and any loan should be formalized in writing and include an interest rate and terms for repayment.

There may not be one universal answer to which is the best way to form or fund a new business, but there likely is an answer as to which is the right way for your new business. Whichever approach to forming and funding your new business fits both your business and your personality, be sure to take the time up front to consider your questions from all angles, and discuss these questions with your business attorney.

Photo credit: Nat Wilson on Flickr