Funding Options for Early-Stage Entrepreneurs

It's not easy for startups that lack experience and connections to raise money. Microfinance, crowdfunding, and incubators are worth pursuing, say business owners

By Karen E. Klein

Young entrepreneurs are defined by their fresh, exciting ideas and passionate drive to succeed. Most, however, lack money—and the experience and connections to turn their concepts into viable businesses. So how do young startups land funding? The answer seems to be: any which way they can. Here's a look at several funding options and how twentysomething entrepreneurs might use them:

Self-funding. Joshua Schwadron, 28, was frustrated when he moved to New York City in 2006 and couldn't find the right people to cut his hair or coach him on public speaking. After it took five tries to find a great piano teacher, he dreamed up Betterfly. The website connects individuals with professional service providers that Schwadron calls "betterists." He hit on a unique way to fund his startup: Schwadron used $125,000 he had won as a contestant on the reality TV show Fear Factor while in college. After some early press, Betterfly attracted offers from a handful of venture capital firms. This summer the company secured just over $500,000 in Series A funding from Lightbank, a Chicago-based seed investor firm.

Not everyone wins big on reality TV. Young entrepreneurs might look for inspiration to Jon Koon, 27, who put his cultural background to work. As a kid, Koon stashed the cash-filled red envelopes he got on his birthdays and at Chinese New Year. By his 16th birthday, he had saved $5,000, which he used to start his first company, Koonichi, to design and sell car accessories. Koon, based in New York, has gone on to found additional design and fashion companies. "When other kids were busy buying sports paraphernalia, I was saving every dime for something that changed my life—my own business," Koon says.

Microfinance. Rapidly emerging as an alternative to traditional business loans, nonprofit microfinance organizations aim to alleviate poverty by making loans to entrepreneurs. Carlo Aclan, 28, got his private pilot's license a decade ago.By 19, he had been certified as a ground instructor and by 21, he was taking students up as a cockpit instructor. An uncle helped him write a business plan and co-signed on the loan for his first plane.

At the ripe old age of 23, with borrowed office space—and piggybacking on an employer's insurance policy—Aclan opened his own flight school, ACLAN Pro Air, now operating at Hayward Executive Airport in California. He got a $10,000 loan in 2008, which he has since paid back, from Opportunity Fund, a Bay Area microfinance organization. "I knew I wouldn't be approved by the bank because of my personal credit history," Aclan says. He used the cash from Opportunity Fund to buy office furniture and commercial signage, have business cards printed, and do some marketing.

Networking. Young entrepreneurs who want to remedy their lack of experience and contacts can join myriad business organizations and get their ideas in front of potential capital sources, says Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire. "Angels don't mind investing in young folks, especially those who are clever enough to realize that perhaps they aren't CEO material," Sohl says.

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