Here's how start-ups get funded before they're ready for venture capital
According to the SBA, entrepreneurs use personal savings more than any other source of start-up financing.
Crowdfunding is a new source of capital for founders, but there's a big difference between equity fundraising online, rewards-based crowdfunding and peer-to-peer lending.
Fledgling businesses rarely command seed or venture funding right out of the gate. But they still need cash to get started.
While entrepreneurs have more capital sources than ever before, they're also faced with a ton of misinformation.
For example, a PwC report last month raved about crowdfunding and how it's helping female founders get ahead in business. The report lumps Kickstarter-style campaigns together with peer-to-peer lending and equity fundraising online. It regards these as a single source of capital, which it calls crowdfunding.
In reality, there's a big difference between securing a loan for your business and winning over backers on a site like Kickstarter. Meanwhile, equity crowdfunding, enabled by sites like AngelList, CircleUp and SeedInvest, is generally for businesses that are further along.
On the equity sites, founders provide a business plan, including information about early sales and user traction. Investors can browse and evaluate deals. After a mutual due diligence process, start-ups issue stock to investors.
Here are the real ways that most entrepreneurs get money at the very start.
Founders with money of their own use personal savings to start a business. Those who come from wealth -- or have great connections -- can rely on family or friends for a little money or perhaps free rent and Wi-Fi. According to the Small Business Administration, entrepreneurs rely on personal savings more than any other source of capital to fund their businesses.
Many founders have a day job and use their income to build a product and start a company. Two famous examples: Steve Chen was working at Facebook when he first started tinkering on YouTube, and Markus Persson was at King.com while building the earliest version of Minecraft.
Credit card debt puts entrepreneurs at risk of damaging their personal credit and losing money to late fees. But credit cards provide easy access for many entrepreneurs before they start generating enough revenue to cover payroll or their own living expenses.
Airbnb's Brian Chesky admitted to students at Stanford University that he and co-founder Joe Gebbia racked up tens of thousands of dollars in credit card debt to keep the lights on in their early days.
Whether they come from banks or newer peer-to-peer and online platforms such as Kabbage, LendingClub, Lend.io or Upstart, small business loans and lines of credit are now available from many providers.
Platforms like Kickstarter and Indiegogo let people raise money for a game, film or gadget before it's actually made. Backers of a particular project know that paying up doesn't guarantee they'll get the exact reward within the time frame they're expecting. But founders and creators know their reputation is at stake if they don't deliver.