A pertinent question for all great business idea is funding. Your idea may be brilliant, but how would you raise the money to get started? As per studies, new business ventures usually fail because of lack of funding. Capital is at the core of startups. Hence, entrepreneurs are ever worried about how to finance their startup.
Despite the wide array of funding sources, there are primarily three general categories: Bootstrapping, Debt, and Equity.
Here, let us explore the sources of funding:
The ideal situation for a startup would be to venture out with a huge investor capital. But sadly, that is never the case. Often entrepreneurs fund their businesses with their own capital through bootstrapping or self-funding.
New entrepreneurs face problems in receiving funding without showing any traction and a plan for potential success. Hence, bootstrapping includes using personal savings, a good stock of sweat equity, credit cards, or borrowing money from friends or family. While convincing banks is a hard work, your friends and family have better faith in your aspirations. Besides the interest rate is also more flexible when you borrow from family or friends.
Bootstrapping is often preferred due to its advantages. When you have your own capital, you are tied to the business. Investors consider this a positive point as your business progresses. Startup funding generated with self-funding is required often to cover the essentials, such as assimilatingbasic office supplies or website domain.
It must be remembered that bootstrapping might only work out when startups do not require money from day 1.
#2 Crowd funding
One of the newer ways to fund a new venture is crowdfunding. So what is this exactly? It is like borrowing money or taking a loan or money for investment from more than one person. What you need to do is put up a detailed description of your business on a crowdfunding platform. You will have to mention your business goals, profit-making plans, how much is required and for what reasons. The lenders will go through these details. If they like the idea, they will invest in your startups. There are online pledges being made for a donation or pre-buying. Anyone can easily contribute to a venture they find interesting or promising.
The next question is why you would opt for crowdfunding. Considering that you are detailing about your goals and aims, crowdfunding platforms prove to be effective ways of promoting your businesses as well. This helps in marketing besides raising the funds. If you think that there might not be enough demand for your product, this is an effective way. Also, crowdfunding omits the professional brokers or investors by raising funds from common people. This might also help in attracting venture capital investment for your business at later stages.
A point to remember: Crowdfunding platforms are competitive if you are looking to earn funding. If you are opting for this platform, ensure that you have a solid business plan that will definitely attract the attention of the average consumers through mere online descriptions.
#3 Business grants
Small business grants are often made by organizations to businesses started by women, veterans or minorities. There is local Small Business Administration that can actually help you out. If you belong to one of these categories, you can reach out to your local SBA or Chamber of Commerce and check if there is a local business grant for which you can apply.
A word of caution: Ensure before investing that you are not required to pay back the borrowed money or there are any conditions in the long run. It will not help you to acquire a debt at this stage.
#4 Angel investors
While the name sounds interesting, angel investors are people with excess cash, who are interested in investing in startups specifically. Such investors might also work in network groups and screen the business proposals for investing. Angel investors can also function as mentors or advisors.
There are several well-known companies that have been started with the help of angel investors. This form of investing usually occurs at the initial stages of growth, where the investors expect up to 30% equity. Thus, they are ready to risk money for better or higher returns.
The only drawback here is angel investors agree for a limited and lesser sum as compared to venture capitalists.
This refers to raiding a capital for startup in exchange for stock in the company. Equity is a rare option when compared to bootstrapping or loans. The reason why owners opt for this source is that it does not engage personal savings or collateral and you need not pay back immediately the installments.
There are several downsides to equity investments. The risks involved are generally high and ROI is for longer periods. It is also like giving up ownership to the business you have just started. Allowing someone a stake in your company ties you to the investor for the sake of the business.
#6 Venture capitalists
These are big bets. Venture capitalists are professional who manage funds to invest in companies that have potential. So how do they invest? It is done against equity and they exit when there is an acquisition or an IPO. Venture capitalists can be your mentors and even act as a litmus test on how the company will fare by evaluating the business from the scalability perspective.
Such funding is ideal for small businesses that have gone beyond the startup phase. Companies, such as Uber, make a perfect case for venture capitalists, where the exit strategy that is in place can return several million dollars that can be utilized to invest and grow the company further.
It is good to remember that venture capitalists are not loyal to your business. They would want to recover their investment within a small window period.
While funding is essential to a startup, what really helps is a correct assessment of how much funding is required to get things moving. Being in debt or remaining under external funding for too long might hinder you from exploring the market opportunities to the maximum.
John Bell has been writing articles on Social Media, skilled business consultant and Financial advisor for the last few years.