How to Start a Social Networking Website Part 8: Startup Financing

Where can entrepreneurs turn to finance their niche social networking websites, particularly in the startup phase? Ahhh, that’s an important question.

Bank Loans are out. Banker’s are risk averse, and social networking websites are risky.

“Traditional banking will always be the least costly source for your financing, but remember bankers are not in business to take on risk. When they ask for three years of company tax returns, it’s because they want to see a steady, reliable set of profitable growth numbers” says the Coleman Entrepreneurship Center’s website.

The exception might be microloans for small amounts (read “under $5,000″), secured by the U.S. Small Business Administration. Here’s a quick link:

Microloans

What about Angel Investors. What do they want?

Guess what? “…a well thought out business plan with a proven product that has a recognizable and eager market need backed by a competent management and development team,” according to Coleman.

Angels also want you to have a significant “barrier to entry” from competing companies. Examples might be a patent, the cost of development or proprietary processes. In the case of social networks, maybe that means a name like Oprah? A super active and fast-growing community of users sold on your brand?

All that said, if you can find a strategic Angel investor in your niche, they can bring both funding and a wealth of expertise. Just in case, here are some how-to links for finding and dealing with them.

Angel Financing: Do’s and Don’ts For Entrepreneurs

Seven Steps to Heaven

Angel Investors (Inc magazine resources)

And Venture Capitalists? I queried VC Ken Gaebler and he answered me with this post: Funding Social Networking Companies. Bottom line: no VC funding for startup niche sites:

“The short answer to your question is that venture capitalists are not going to pay much attention to a startup social networking company that wants to raise millions of dollars but doesn’t yet have much traction. …That’s because a social networking superstar typically can be identified before they need much capital.”

He claims that “a great social networking site can be built on a shoestring.” The money that VCs put into social networking is typically for server bandwidth to support the fast growth.

Lots of other great advice in his post, too, about the fuzziness of business plans for social networks, being late to the party, and niches filled and untapped. Be sure to check it out. Gaebler’s final word to social network entrepreneurs:

Our advice is to talk to them [VCs] only when you have demonstrated some initial success and have had at least 15 seconds of fame in the marketplace.

OK, now Friends and Family money. Because these people know you and believe in you and want to support you, they are your best bet.

So how do you approach them? With a well thought out plan. Here are links to details.

Friends with Money

Tap into Your Network for Business Funding: When You Hear No

The Family Plan

Raising Capital: Friends, Family and Fools

Introductory Guide to Startup Financing

Or maybe if you have assets, you can bootstrap. Here are some ideas other than your credit card:

Using Personal Assets for Financing life insurance, CDs, mortgages, IRAs and 401ks

Ex-SCORE Chicago chair and financing expert Larry Pelka says, “Using personal assets is a time-tested method to get a start. A sign of success can get others on board, including angels and/or friends. This is a segment of the market that is difficult to finance on usual terms.”

I also emailed Raman Chadha, Executive Director of the Coleman Entrepreneurship Center, for his advice on funding niche social networking websites. He urges entrepreneurs to think carefully about the site’s long-term value to potential users.

“Many entrepreneurs launching social networking sites have a hard time demonstrating/articulating the value being generated for users. Entrepreneurs should ask themselves (or better yet, ask others) “why will a user return to my web site?”. Ego, attention, money, etc.?

“Answering that question will help prospective investors understand the company’s value proposition. And furthermore, it will help the entrepreneur understand how viable the web site may be for the future.”

In essence, you have to make things happen before outsiders will want to participate. You have to be well on your way to building a sustainable community that users love. So get in there and build a passionate community. If you succeed, the investors and ad revenues will likely follow.

How are you financing your social network?  Please leave me a comment.

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