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.

Young people can meet those angels, not to mention venture capitalists, attorneys, accountants, and marketing experts, through groups such as Young Professionals of America, or its regional affiliates, and SCORE, which has a list of resources on its website. “Practically every state has a venture capital association,” says Bruce Freeman, a small business author, consultant, and adjunct professor based in New Jersey. “These are places where people who need money meet with people who have money,” he says. While the groups themselves are usually members-only, they sometimes have larger events that may be open to nonmembers.

Government. To start, aspiring entrepreneurs should know that there is no such thing as “free” government money. “If you live in an area that qualifies as depressed by federal standards, the Economic Development Administration or Department of Agriculture may offer investment funds for your business venture,” says Deborah A. Osgood, founder of small business advice site Buzgate.org.

Entrepreneurs with products in the biomedical, energy, or defense sectors should inquire about Small Business Innovation Research, says Janis Machala, an angel investor and founder of Paladin Partners in Kirkland, Wa. “These grants don’t know how old you are or necessarily care how old you are, only what great breakthroughs you are able to achieve,” she says. “I have been involved with undergraduates and graduate students who have gotten between $100,000 to $1.5 million in grant funding—alongside a professor who brings credibility to the endeavor.”

Crowdfunding. Online communities have cropped up in recent years to connect entrepreneurs with investors and lenders. Peer-to-peer lending sites such as Prosper, Loanio, and LendingClub offer loans from individuals. Creative types, looking for capital to fund movie, music, and art projects, can turn to sites such as Kickstarter or IndieGoGo.

A new site, MicroVentures.com, aims to vet entrepreneurial companies, help them create private placement memos and register as securities while facilitating investment from individuals online. “The companies we’re vetting now are looking for $100,000 to $500,000,” says founder Bill Clark, a Securities & Exchange Commission-registered broker-dealer and former credit-risk manager with Dell Financial Services. Clark foresees small investors kicking in as little as $800 apiece. “It’s kind of a Golden Age for startup entrepreneurs, with the Internet and blogging and sites that help them find money,” he says. “I’ve learned so much from other startups who are blogging about their search for funding and the startup process. You can even get legal questions answered without having to pay a ton of money.”

Business Incubators. Rene J. Pinnell, 27, got a film degree from the University of Texas at Austin. Working for a technology startup then changed his career path. As a grad student, he and a classmate sketched out an idea for a mobile application that would create spontaneous gatherings.

Last winter, he attended an event called 3 Day Startup, where he met four would-be entrepreneurs who eventually teamed up with him to form his company, Hurricane Party.This spring they were selected to participate in a seed incubator called Capital Factory, which operates on a model similar to Y Combinator, First Round Capital, Village Ventures, and several others. Participants get $20,000 cash, $20,000 worth of services (including free office space), and mentoring from 20 entrepreneurs.

Pinnell and his partners put in hundred-hour work weeks all summer, culminating in a chance to pitch Hurricane Party to 200 investors at Capital Factory’s “Demo Day” earlier this month. The concept was well-received, Pinnell says, and he hopes to raise $250,000 from angel investors this fall.

Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

http://www.businessweek.com/print/smallbiz/content/sep2010/sb20100923_063215.htm