Yesterday I had a long talk with a friend that was looking for money for his startup. We talked about different sources of financing: business angels, investors, loans, venture funds, etc.
My observation is that every founder wants to get the money from a large well-known venture fund, then smaller investors, then business angels. When all the above fails, they try to get a loan as a last resort.
To me the order should be reverse.
First place to look for money is your customers. Try selling your product with payment up front. Why is this the best source of financing? Because you don’t have to pay back this money. Just deliver your product.
The loan is in second place. You borrow money. You pay back your debt plus some interest, and you don’t have to give away any equity.
Investor money should come as a last resort. Not only you pay with the equity, but often you end up with less control also.
I often hear that convincing the investor is easier. I don’t agree with this statement. The average time to lock the investor deal in my experience is from 9 to 12 months. I hope you can beat this time when selling to your client instead.
Starting with selling to your clients feels more right, too, because this is what your company should be doing anyway. I know this is scarier because we, as founders, are afraid of being rejected by the customers. But if this happens, ask yourself a question:
If my clients are not giving me the money, why should an investor do it?