Funding Options For Women Led Startups

Early stage businesses often find locking down funding can be a real challenge. In particular, female founders looking for equity financing find it especially difficult. According to a study commissioned by the National Women’s Business Council, titled “High Growth Women-Owned Businesses’ Access to Capital,” men receive NINE TIMES more equity financing for their businesses than women.

The only way to improve the chances of success for female founders is to increase the pool of angels who are willing to invest in companies led by women, which, thankfully, has been a growing trend in the business world in recent years.

Angel investment is one form of equity financing. According to the University of New Hampshire’s Center for Venture Research, angels invested $21.3 billion. Angel investor have to be accredited, which means that they must generate an annual income of $200,000 (or $300,000 if a couple) and/or have a net worth of at least $1 million, in addition to their home.

The number of women angels has doubled from 2006 to 2016 and there has been a corresponding increase in the number of female founders receiving funding – almost doubling from 7,037 to 13,962.

As the investments in women’ owned businesses start to reach parity with men, it’s important to highlight methods of fundraising for businesses of all sizes. Below is a quick overview of some of the top funding sources you might turn to, along with their benefits, drawbacks, and when most business owners tend to leverage them.

Family and Friends

We all have supportive family and friends that we can rely on. If you believe that you truly have a great idea, talk to them about your business plan, vision, and the future goals of your company. Family and friends can be an invaluable resource and if your business is successful, everybody in your immediate circle will be a winner.

Who Is This For?

Family & friend investors are ideal for startups, or even an idea/pre-start-up phase.

Benefits

  • Fortunately, this type of investor already knows you well, which means that trust should already be established.

  • It is an excellent first option for funding a startup.

  • A credit score isn’t required as is the case with business bank loans.

  • Family members are likely to be more forgiving when things fail to go according to plan.

Drawbacks

  • You have to ensure that the people you seek funding from are close, trusted friends to ensure that people don’t back out.

  • Asking family and friends for financial assistance can be difficult, particularly if they aren’t entrepreneurs and thus have a hard time seeing your vision.

Angel Investors

You have probably heard the term angel investor, seed investor, private investor, business angel, or informal investor. All these refer to the same thing: people that are willing to invest in your startup in exchange for some ownership equity in the business.

Simply put, they are offering you money, but want to also own part of the business so that they may recoup their investment. Since they will be part owners, they will also continue getting paid a portion of the profits.

Angel investors are usually affluent people that want to help get your business running since they can see your vision. They may even be fellow business owners who can offer you helpful advice. The U.S. Small Business Administration Office of Advocacy estimates that angel investors provide startups with $330,000 on average and are looking to make about 20 percent profit off their initial investment.

Who Is This For?

Angel investors are better suited to helping startups, particularly those that fit within a certain niche market.

Benefits

  • They are less risky compared to traditional investors

  • They provide startups with funding

  • They provide connections through a wide network that can help the business

  • They offer plenty of useful information and expertise

  • The debt isn’t expected to be paid back if the business fails

  • It is a good option for companies that don’t have sufficient cash flow of business credit to take out loans

  • There are flexible terms within the agreement because they are investing their own money when compared to the larger venture capital firms that invest either corporate money or other people’s money.

Drawbacks

  • Angel investors will have a say in the direction your business takes

  • Angel investors will often request equity in the business

Venture Capital Firms

Women-owned and female-oriented venture capital funds are on the rise because more women are starting their own businesses.

Traditionally, women have been underfunded, but they usually double their return on investments when compared to their male counterparts. So, it is hardly surprising that female venture capitalists are more willing to support other female entrepreneurs. After all, it is a statistically smarter and more profitable investment.

Who Is It For?

Venture capital firms are ideal for more established, profitable businesses looking to expand.

Benefits

  • You can expand the business

  • Your business will have more resources to become successful

  • Venture capital firms invest $11.7 million on average according to the SBA

  • Large network for company support

  • You can exceed the expected financial growth and success if properly managed

Drawbacks

  • More financing may translate to higher risk

  • Terms tend to be more stringent

  • Shareholders will have a say in the direction or strategies of the company

  • Liquidation of the company if it fails to produce at the expected rate

  • Venture Capital partners are fully involved because more money is at stake

  • A higher return on investment is expected

  • The company may completely change direction from the original vision if necessary.

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