Shedding Light on Unconventional Small Business Funding Paths
Younger small businesses and entrepreneurs in the startup phase are having a hard time acquiring financing from large banks and other financial institutions. One common place for them to turn to is to venture capitalists and other wealthy “angel investors”, so called because of how they tend just appear out of nowhere and rescue a struggling business. This source of financing has shown decent growth as the amount invested into small business during the first have climbed 3.1 percent from the previous year to $9.2 billion. However, a recent study by the Center for Venture Research at the University of New Hampshire recently found that the majority of the money from angel investors goes towards businesses in the medical devices, software, and biotechnology sectors. These are of course very important sectors for America’s future but they don’t represent the bulk of small businesses in America. How then, show other more traditional entrepreneurs approach fundraising?
Consider the way that Josh Lambeth, creator of the “octocopter”, went about it. First, for those unfamiliar, the octocopter is a remote controlled helicopter-like device with 8 rotors for improved stability. To fund his business, Josh turned to a micro-lending group that is part of Accion U.S. Network, a national nonprofit. That particular group provides loans of up to $300,000 with an average loan value of $10,000. Naturally, some 60 percent of their typical borrowers are low to moderate income borrowers. Businessweek now continues with two other examples of entrepreneurs finding alternative methods of funding, “The Online Merchant Funders: Atlanta-based Kabbage, which provides inventory financing for sellers on marketplaces such as EBay (EBAY), Amazon (AMZN), and independent online stores, has 75 employees, has raised $56 million, and expects nearly $10 million in revenue this year, according to Co-Founder and Chief Executive Officer Rob Frohwein. When it launched in late 2008, “we were told we had a crazy idea, so we had no success” from venture capitalists, he says. Frohwein was able to get technology and services worth about $200,000 in exchange for equity stakes in the venture by traveling to several vendors’ offices, relying on introductions from early employees, and pitching them just as he would angel investors. He also used Microsoft BizSpark, a program that provides free software-development tools to startups. Frohwein estimates that the technology was worth more than $100,000 to Kabbage during its early days…”
Source - Businessweek