For startups, entrepreneurs and small business owners, the future looks bright indeed. According to the Kauffman Index of Growth Entrepreneurship, U.S. entrepreneurial activity has continued to increase for the past three years since 2014, rebounding from the slump of the Great Recession. What's more, 2017 broke records for the most venture capital invested in a single year worldwide.
Early Stage Slump
Despite the more business-friendly landscape, many startups and small businesses still face the pressing challenge of obtaining funding. Eighty-two percent of entrepreneurs start their business either from personal savings or by borrowing from family and friends.
The difficulties can be particularly onerous for companies in the seed stage of funding. Venture capitalist Fred Wilson has noticed what he calls the "early stage slump" over the past year in which there's been a significant decline in the number of deals closed between angel investors and startups in the seed stage.
You likely see this downward trend in one of two ways. Either it's a worrying harbinger of worse news to come, or it's a necessary course correction after investors decided to stop throwing money at every tech startup who has the next silly "Uber for X" idea.
Regardless of which side you fall on, companies that are poised for success will always be able to obtain funding, even with the market becoming more difficult. Early-stage startups usually employ different strategies to raise money as they move up the ladder:
- First, they use borrowed or donated funds from family, friends and coworkers, or they use a fundraising platform such as Kickstarter and GoFundMe. This is almost always only enough to keep the startup alive for a little while; only a very few startups are able to bootstrap themselves successfully.
- Next, they may get funds from angel investors in exchange for equity in the business.
- Once they're big enough, they can go through several rounds of venture capital funding and get attention from institutional seed funds.
AngelList Syndicates & Token Sales
In 2018, however, there are more options than ever for startups to raise money. For example, U.S. startup marketplace AngelList offers a list of "AngelList Syndicates," which are venture capital funds, composed of a group of investors that are created to make a single investment.
Another fascinating new alternative for startups to raise money is token sales. If you've ever given your spouse a coupon for "one free massage," for example, then you'll understand the basic concept behind token sales. Tokens represent a good or service that the owner can obtain from your company.
Essentially, you sell a "token" to investors and potential customers, and the sale of this token is recorded on a blockchain (the same technology that underlies cryptocurrencies such as Bitcoin). The token's owner can do one of two things with it: redeem it with your business in order to receive the promised service, or sell it to someone else and try to turn a profit.
Because the business idea is relatively new, there are still a lot of questions and potential legal risks surrounding token sales. However, token sales are still generating a great deal of excitement because they give investors liquidity. Before, investors had to keep their money in the company until a liquidity event such an IPO; now, they can pull it out as long as they find a willing buyer. For example, in May 2017 cloud storage provider Storj Labs raised $20 million in token sales in just six hours; users will be able to exchange their tokens for storage space with the company.