5 Ways to Fund Your Web Startup

Key Takeaways

Startup incubators like Y Combinator and TechStars can provide initial funding, mentoring, and access to services for a small equity stake in your business.
Contests and business plan competitions can offer substantial cash prizes and mentoring for promising startup ideas.
Equity-for-work platforms like WebEquity and Prototype Invest allow entrepreneurs to trade company shares for necessary work or services.
Social lending sites, family and friends, and self-funding through side jobs or consulting gigs can provide alternative funding avenues for startups.

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.

Y Combinator in Cambridge, Massachusetts and the San Francisco Bay Area
TechStars in Boulder, Colorado
Seedcamp in London, UK
YEurope in Vienna, Austria
Summer@Highland in Lexington, Massachusetts
LaunchBox in Washington, DC
Founder’s Co-Op in Seattle, Washington
DreamIt Ventures in Philadelphia, Pennsylvania
Bootup Labs in Vancouver, BC, Canada
Bootphase in Atlanta, Georgia (though it seems still unlaunched)
CIIE iAccelerator in Gujarat, India
Awesome Inc in Lexington, Kentucky
Startup@PARC in Palo Alto, California (more about intellectual support than cash funding)

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.

Frequently Asked Questions on Funding Your Web Startup

What are some alternative ways to fund my web startup if I don’t have personal savings?

If you don’t have personal savings, there are several other ways to fund your web startup. You can consider bootstrapping, where you start your business with minimal resources and keep your operating expenses low. Another option is crowdfunding, where you raise small amounts of money from a large number of people, typically via the Internet. You can also consider venture capital, where investors provide funding in exchange for equity in your company. Additionally, you can apply for business grants or loans, or seek funding from angel investors.

How can I attract venture capitalists to invest in my web startup?

Attracting venture capitalists requires a solid business plan, a unique product or service, and a strong management team. You need to demonstrate that your startup has high growth potential and that you have a clear strategy to achieve this growth. It’s also important to network and build relationships with potential investors. Participating in startup events and pitching competitions can also help attract venture capitalists.

What are the pros and cons of crowdfunding for web startups?

Crowdfunding can be a great way to raise funds for your web startup, as it allows you to reach a large number of potential investors quickly and easily. It can also help validate your business idea and build a community of supporters. However, it also has its downsides. It can be time-consuming to create a successful crowdfunding campaign, and there’s no guarantee that you’ll reach your funding goal. Additionally, you may have to give up a percentage of your company in exchange for funding.

How can I apply for business grants for my web startup?

Applying for business grants involves researching potential grant opportunities, preparing a detailed business plan, and submitting a grant proposal. The proposal should clearly explain your business idea, how the grant funds will be used, and how your startup will benefit the community or industry. It’s important to follow the grant application guidelines closely and to submit your application before the deadline.

What are angel investors and how can they help fund my web startup?

Angel investors are individuals who provide capital for startups in exchange for ownership equity or convertible debt. They can provide valuable funding for your web startup, especially in the early stages. In addition to funding, angel investors often provide mentorship and access to their professional network. To attract angel investors, you need to have a compelling business idea, a strong business plan, and a capable team.

What is bootstrapping and is it a viable option for funding my web startup?

Bootstrapping involves starting and growing your business with minimal resources, relying on personal savings, and reinvesting profits back into the business. It’s a viable option for funding your web startup, especially if you want to maintain full control over your business. However, it can be challenging, as it requires careful financial management and may limit your startup’s growth potential.

How can I prepare a compelling pitch for potential investors?

Preparing a compelling pitch involves clearly articulating your business idea, explaining your market opportunity, outlining your business model, and demonstrating your team’s ability to execute the plan. It’s important to be concise, engaging, and to focus on the value proposition for the investor. Practice your pitch repeatedly and be prepared to answer tough questions.

What are some common mistakes to avoid when seeking funding for my web startup?

Some common mistakes to avoid include not having a clear business plan, underestimating the amount of funding needed, not researching potential investors, and not being prepared to demonstrate how the investor will get a return on their investment. It’s also important to avoid giving up too much equity early on, as this can limit your control over the business and your potential returns.

Can I seek funding from multiple sources for my web startup?

Yes, you can seek funding from multiple sources for your web startup. This is known as “funding stacking” and can include a combination of personal savings, bootstrapping, crowdfunding, venture capital, business grants, loans, and angel investment. However, it’s important to carefully consider the terms and conditions of each funding source, as they can have implications for your business.

How can I increase my chances of securing funding for my web startup?

Increasing your chances of securing funding involves having a solid business plan, a unique product or service, a strong team, and a clear market opportunity. It’s also important to network and build relationships with potential investors, to understand their investment criteria, and to be prepared to demonstrate how they will get a return on their investment. Participating in startup events and pitching competitions can also help increase your visibility and attract potential investors.