Imagining The Perfect Start-Up Funding Source

by: James Nicholson

I've just written about the need for new forms of startup financing and what one interesting fund called Founders Co-op is doing about it. There’s a lot to like about both Founders Co-op and its much more established counterpart Y Combinator, but neither is perfect. Which got me to thinking: from an entrepreneur’s point of view, what would the perfect funding source look like?

Here are some thoughts:

Open to all. Access to venture capital and angel investors depends almost entirely on who you know. This shuts out lots of innovative startups who don’t happen to know the right people or who are not located near sources of capital like the Bay Area. One of the most attractive aspects of programs like Y Combinator is that it’s open to any startup who wants to apply. Lowering the barriers to accessing capital dramatically increases the pool of great startups.

Risk-taking. Much has been written about how the typical VC is risk-averse and only funds companies that other VCs are interested in. While this is not entirely true (I know plenty of VCs who are open to new ideas), in general the oddball companies with wacky ideas never get VC money. Some of these wacky ideas turn into the most lucrative ones. The ideal funding source would not have to justify their investment to a bunch of limited partners.

Visionary. The perfect funding source would be able to see the potential in the idea and the founding team behind the startup. This doesn’t mean every startup has potential, but it does mean that investors need to step out of their comfort zone from time to time and see the possibilities. It also means investors need to look beyond the Bay Area for startups. There are plenty of interesting companies being formed around the world.

Flexible funding. One of the biggest drawbacks of Y Combinator is the small amount of funding each startup receives. The idea behind Y Combinator is to get the founding team from idea to product as quickly as possible and for this the small funding is fine. But other startups have different needs. Some have already launched and maybe have one or two employees. For these companies, access to capital in the range of $200,000-$500,000 gets them to the next step of development. So an ideal funding source would be able to offer just the right amount of funding, depending on where the startup is in its life cycle.

More than just money. The ideal funding source not only provides the necessary capital, but also gives hands-on advice, sources potential business development deals, and helps the company to attract great employees.

What else would you look for in an ideal funding source?