5 Ways to Fund Your Web Startup

Josh Catone

Yesterday we published a list of the top 10 web sites of 1998. When those sites were tops on the web, starting an Internet business was a pricey proposition. Times have changed, and it no longer takes millions or even hundreds of thousands of dollars to launch most web applications. It still takes some time, and money though, so below is a list of 5 ways you can raise money to fund your web startup.

1. Apply to a Startup Incubator

There are some people who argue that the growing number of small, seed fund startup incubators out there are a raw deal for the young entrepreneurs they attract. They argue that the programs, like Y Combinator and TechStars, take too much equity in exchange for such a small cash investment (generally 5-10% for between $10,000 and $30,000 depending on the program). But we disagree.

In addition to enough cash that you can afford to work full-time on building your prototype for a few months (especially if you’re young and frugal), these programs generally offer invaluable access to advice and mentoring from brilliant minds who have successfully gone through the process of starting up a web business in the past. Giving up a 6% stake in your business is worth it when the advice, mentoring, and access to services (such as hosting, PR, and legal) boost your chances of success and make sure you don’t get screwed down the line.

What follows is a list of some of the programs you can look into.

2. Enter a Contest

This may be the strangest option on this list, and the least likely to work for you. But there are contests out there where you can win money for your startup. You Be The VC, for example, in which the crowd votes on their favorite idea, will provide its winners with guidance and mentoring from top companies and advisers, as well as office space and a stipend for living expenses in Cambridge, Massachusetts.

If you’re in school, consider entering a business plan competition. The Harvard Business School has one with a $20,000 cash and services top prize, while MIT’s Entrepreneurship Competition is even better: it has a $100,000 grand prize up for grabs each year. A number of other business schools run similar contests every year.

3. Trade Equity for Work

Last month we wrote about WebEquity, which is a marketplace for sweat equity investments. Anyone looking for help on a web business can post what they need and how much of their company (either in equity or back end revenue payments) they’re willing to part with. Since our post, WebEquity has expanded beyond Australia to include the USA, Canada, and the United Kingdom.

Another option is Prototype Invest. The Denmark-based firm defines itself as a “Venture Capital firm providing software, web applications and guidance, instead of money.” Prototype Invest takes ideas and creates workable prototypes to pitch to VCs charging you in equity. I wrote an exclusive preview of Prototype Invest for ReadWriteWeb in April.

Giving out equity to get your startup up and running is an interesting route and one that requires a lot of trust. Make sure you put everything in writing before you begin.

4. Use Family and Friends (or Strangers)

Of course, you could go to a bank and get a business loan, but there are other options thanks to the web. One is social lending, where your loan comes in via small contributions from a large number of people in the crowd and the payoff for you generally comes in the form of better interest rates. There are three main social lending sites to consider Zopa, where rates start at 8.49%, Prosper.com, with rates starting at 8.68%, and LendingClub, with rates as low as 7.88% as of this writing.

If you’re looking to raise money from family and friends — always a popular option for entrepreneurs — to avoid the messiness that might occur later, you can use Virgin Money to keep track of it all.

Of course, if you already have your site up and running and just need some additional funding to give it a little boost, you could always ask your users. That’s what online knitting community Raverly did last April. And it worked. In three weeks they’d raised $71,000 from over 3,000 of their most devoted users.

5. Self Fund with Side Jobs

Possibly the most popular way to raise money and start a web app, is to just lay out your own cash. Many entrepreneurs these days will use money from consulting gigs or a day job at a tech company to fund their startup, which begins life as a side project. It’s not easy — you’ll be working 14 hour days, not spending any time with your friends or family, and generally staring at a computer screen whenever you’re not sleeping — but the pay off is that you own 100% of your startup and you’ll (hopefully) have a lot less debt to deal with.

This is the approach that web app sellers 37signals advise in their book. “These days it doesn’t take much to get rolling. Hardware is cheap and plenty of great infrastructure software is open source and free. And passion doesn’t come with a price tag,” they write. “So do what you can with the cash on hand. What can you do with three people instead of ten? What can you do with $20k instead of $100k? What can you do in three months instead of six? What can you do if you keep your day job and build your app on the side?”

And it’s true: the cost of entry for web startups is much, much lower now than it was a few years ago. (I co-own what is likely the largest Ruby on Rails discussion community on the web and in 2.5 years we’ve still put under $1,000 of our own money into it, for example.) 37signals built their first product, Basecamp, as a side project while still doing client work.