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BusinessColumnistsJamie Herzlich

Small Business: Funding sources for startups

Startups raised about $531 billion last year from

Startups raised about $531 billion last year from a variety of sources, with $185.5 billion coming from personal savings and credit. The experts say that entrepreneurs who put their own money and energy into their businesses are more likely to draw investors. Credit: iStock

Self-financing and family and friends are still the main sources of capital for startups, according to new research.

Startups raised about $531 billion last year from a variety of sources, with the bulk -- $185.5 billion -- coming from personal savings and credit, according to a recently released information by Fundable, an online crowdfunding platform for startups and small businesses.

Bottom line, say experts: Without their own capital many startups would not exist.

"Statistically the likelihood that someone else is going to fund your company is so ridiculously low," says Wil Schroter, CEO of Ohio-based Fundable.

You have to put your own skin in the game.

Aside from personal savings and credit, other top startup funding sources Fundable cited were: friends and family, which accounted for $60 billion of startup funding last year; venture capital ($22 billion); angel investors ($20 billion); banks ($14 billion); and crowdfunding ($3.2 billion).

Crowdfunding growing. The crowdfunding segment -- where entrepreneurs can raise small amounts of funds from a large group of people via online portals -- is the fastest-growing funding source, expected to total $5.1 billion in 2013, according to the information.

"Crowdfunding is opening up exponentially more funding opportunities," says Schroter, who started Fundable in 2012.

But realistically, companies will have to tap multiple sources for funding.

Sam Friedman, CEO and founder of Market Network Exchange (MNX), a two-year-old software provider for the barter and corporate trade industry, understands this.

The company, which recently completed the Long Island Tech COMETS accelerator program in Mineola, was started by self-financing and tapping into family and friends.

"There's not a very good chance of getting a loan from a bank until you prove revenue and scalability, and that's tough for a startup," says Friedman.

The company recently applied for a $100,000 Small Business Administration 7(a) loan and made a pitch to the Long Island Angel Network for funds. "We're looking for $750,000," Friedman says.

Angels want 'sweat equity.' Bob Brill, an Angel Network board member and managing partner of Newlight Management in Jericho, which manages $100 million in tech investments, says he likes to see companies that have been in business at least six months and whose founders have put in "a significant amount of sweat equity."

Brill says there's been a healthy startup climate on Long Island with multiple resources to help them grow, including his network, LaunchPad, Accelerate LI and the LI Tech COMETS program.

He said Angel Network and its members have probably invested more than $4 million this year in startups and early-stage companies, including Hauppauge-based eGifter, a social gifting service of GroupGifting .com. Brill is on eGifter's board.

"I think there's been a marked increase in angel activity on Long Island," he says, noting that eGifter raised $3 million from local angel investors just in the past year.

Just as angels and venture-capital funds like to see an entrepreneur's skin in the game, so do lenders.

Lenders want proof of faith. "Lenders want to see that they have enough faith in their business to put their own money at risk," says Marianne Garvin, president of Community Development Corp. of Long Island in Centereach, which provides SBA 7(a) loans in conjunction with New York Business Development Corp.

The CDC generally likes to see companies in business at least nine to 12 months, says Garvin, noting it also helps if owners have good personal credit and a second source of income to be able to pay back the loan.

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