Alternative source of fund – Employee Investors
One of the common sources of equity money is potential employees, especially people you’re either worked with in the pas or your have personally known in the same industry. By offering equity to potential employees, you not only get an equity investment but you also get (presumably) a talented and committed employee.
However, raising equity from potential employees may raise a bunch of serious issues that you need to consider such as what if later on you found that the employee’s work proves less than satisfactory or if the employee decides to join or start a competing company? These are the issues that need to be addressed with a good business consultant / lawyer before you even approach a potential employee-investor.
Alternative source of fund – Venture Capitalists
Most Venture Capital firms have fairly specific criteria for the type of business / situation they are interested in. Venture capitalists are typically looking for a company that has a realistic possibility of becoming a very large business within 5-7 years, large enough for a major public offering, or for sale to a big corporation. This would allow them to cash out their investment, which they hope will have multiplied in value. As a result, most VC firm only finance a very small percentage on new businesses.
Contrary to popular belief, many venture capital deals are not limited to high tech companies, and many are for second or third round financing. Since venture capitalists are approached with many potential deals everyday, you should try very hard to get a personal referral to get you business plan carefully considered.
Alternative source of fund – Relatives
Although it may feels like begging – when you need money for a business, you just have to swallow your pride. Approach your relatives very much like other outside investor. Explain NOT how they can help you out, but how they can make money.
Have a written agreement and have your lawyer read it. A written agreement with relatives will not only help avoid legal problems but will also help avoid potentially bitter family relations. Even with your parents, siblings, or spouse, keep your business relationship formal.