Each year, thousands of startups fail despite having a good idea or product. Usually, a lack of adequate finances is the main cause of this failure.
Understanding startup financing is more than knowing the different funding sources. It’s about understanding your startup’s product, the marketplace, and what it would take to put it on the map.
Fundraising remains the greatest challenge for most entrepreneurs and is the lifeblood of any startup. But it’s not impossible; with a little know-how and creativity, you can get your business off the ground.
The idea is great, you know it has the potential to be a smashing success, but you’re stuck trying to find the funds to get it off the ground. How do you get past it?
There are a few different ways you can do this without resorting to begging on the streets, and over time, as your business grows larger, you’ll be able to use these techniques to make bigger amounts of money.
If your startup is just getting started, or you need funding ideas for your existing business, there are many ways to obtain funding. This blog post will help you to understand all of the ways and options available to entrepreneurs seeking funding so that you’re not left in the dark
Let’s explore those different funding avenues so you can choose the right one to raise money and get people excited about your new startup.
How to Choose the Best Funding Path for your Startup?
Choosing the right funding method can be a complex decision for a startup. Therefore, it stands to reason that you should make an informed decision.
How much is your company worth today? Five years from now, what will it be worth?
What is your plan for getting from here to there? Startup valuation. Choosing the right funding method today will determine how your business will run for the rest of its lifespan and how much value you can extract in the long run.
Choosing the right funding strategy is a critical step in deciding how to grow your business. Here, we’ll explore how each funding method works and how it will affect your business immediately.
Bootstrapping refers to the idea of achieving success on your own, without support or assistance from outside. Bootstrapping offers entrepreneurs many benefits, which include less financial risk due to lower start-up costs and entrepreneurial freedom from outside investors.
The bootstrapping process involves building a business from the ground up without seeking outside financing or investment. The advantage of starting a business from the ground up is that you don’t need a lot of capital, but you also have the greatest freedom as you define and structure your business.
It basicially means you make the most of what you have. It is a statement of intent from an entrepreneur that they are confident about the product or service they are offering, and that no outside investment is required.
Take a look at an email marketing company called ConvertKit. They bootstraped their way to $1.1 million dollars in ARR.
Bootstrapping lets you avoid being held to other people’s requirements and perhaps limiting the prospects of your product or company. During the startup phase, companies often reduce costs by reducing the administrative staff, avoiding excessive salaries and wages, and not carrying an extra labor force by outsourcing jobs.
While history indicates that there is no single recipe for building a billion-dollar company, it seems that bootstrapping is an important ingredient that should be on the list.
The company ShutterStock, which contains millions of stock images, is one of the earliest startups that bootstrapped its way to becoming a billion-dollar company. Another important startup that bootstrapped its way to success is Mojang, the creator of the famous game known as Minecraft.
Other startups that have bootstrapped their way to becoming one of the biggest companies around the world include Zoho, BiggerPockets, Dell, etc.
Venture capitalists, or VCs, deploy capital for high-risk startups in exchange for equity or common shares. This arrangement helps early-stage companies grow at a rapid pace while also often paying a considerable return on investment to the venture capitalist.
It can be a person or company that invests in a business venture, providing capital for a startup or expansion. The VC provides finance in the form of equity for use in exchange for an equity stake. Whether the company is a fledgling startup or an established company looking for ways to expand to a new market is irrelevant.
VCs receive shares of stock, convertible debt, or both in exchange for the financial support they provide. Venture capitalists provide the money that is necessary for new and fast-growing businesses. In addition to providing the capital, the VCs use their networks, expertise, and judgment to help suitable companies grow rapidly.
There are numerous examples of companies that have already made it big thanks to venture capital. Alibaba, Twitter, Spotify, Xiaomi, Dropbox, Facebook, and numerous others all got their start with venture capital funding.
Angel investors are affluent individuals who invest in start-up companies with an equity stake, rather than loans or debt. Angel investors help fund startups by providing funds in exchange for ownership stakes in them. Unlike Venture Capitalists, Angel investors are not bound to a single industry, they invest in startups across many industries.
Young startups can benefit from angel investment because angel investors come from all walks of life and possess varied business expertise that small startups can put to use as they grow and change. Their goal is to find companies in the early stages of their growth and devote significant time, expertise, and capital to help them grow.
They may also supply valuable non-financial support to their portfolio companies, including mentoring and networking opportunities, or even hands-on operational assistance.
The money you get from angel investors does not need to be repaid if your business fails, but they will get a seat at the table for decision-making conversations, which might not be a good fit for some entrepreneurs.
We recommended reading: 15 business lessons from Naval Ravikant – founder of AngelList
Angel investors are generally accredited for investing under $150,000 and often invest around $50,000. There are numerous examples of angel investors, such as Jezz Bezos’ investment in Domo and Everfi, Jeff Clavier’s investment in UStream and Seesmic, Jason Calacanis’ investments in AdStage and Skift, and many others.
Considering that crowdfunding is all over social media right now, you may have already heard of it. Crowdfunding is the new way to finance a project or business venture by raising small amounts of money from a crowd of people. Fundraising through this method isn’t easy, but it can help your project to get exposure and raise funds.
Crowd-funding platforms like Kickstarter and Indiegogo are great places to get funding from people who want to support what your project/startup/business is about.
Crowdfunding is a means of raising money by appealing directly to the public and receiving financial backing from the online community.
It’s a great way to get your idea for a project or business off the ground. And it can provide you with the resources to accomplish innovative projects that may not have been possible otherwise.
However, knowing how to launch and run a successful crowdfunding campaign is essential for entrepreneurs, innovators, and vocal individuals with novel ideas and big dreams. It’s important to develop a pitch that tells a story and strikes a chord with people, so you have to come up with a story that makes them want to help.
Campaigns like Oculus VR Headset on Kickstarter and GoFundMe that resonate with the public are among the most successful on the site. Other ventures that have generated millions in crowdfunding from the public include such as Dash Headphones, 3Doodler 3D Desktop Printer Pens, Fidget Cube, and more.
Incubators & Accelerators:
Startup incubators and accelerators are springing up around the world to help entrepreneurs get their ideas off the ground and running in record time. As a result, Startups today are easier to turn into real businesses. A lot of this has to do with the advent of startup incubators and accelerators.
The purpose of these incubators and accelerators is to support startups beyond the provision of seed money. Many of these provide mentorship, office space, a connected community, and sometimes even equity financing from venture capital firms. Incubated startups also have greater acceptance among angel investors, VC firms, and other sources that fund promising new ventures.
Founders of startups are aided by accelerator programs in refining their ideas and building a successful business model. With startup incubators, entrepreneurs can get mentorship and training from industry experts.
Accelerators and incubators also help young companies connect with industry experts and partners who can offer resources, products, or services essential to a young company’s success.
Amidst the abundance of startup incubators and accelerators in the market today, Techstars stands out from the bunch. Some notable companies that have emerged from the TechStars program include Digital Ocean, Mocavo, SketchFab, and numerous others that have raised billions of dollars in funding.
Startup loans are any type of financial solution specifically designed to help budding entrepreneurs get their young businesses off the ground. Startup loans come in several forms to assist small businesses in gaining a competitive edge in this increasingly competitive market environment.
These business loans come from your local bank or from a third party like a private lender who may specialize in small business financing. One of the benefits of these types of loans is that they come with better rates than unsecured personal lines of credit and tend to have more flexible repayment options.
Getting a startup loan is the best thing you could do for your business. After all, why would you give away equity in your company to venture capitalists or family and friends, when you can get either a low-interest rate from an investor or a fixed/low-interest rate from a bank?
Startup loans are safer than self-funded entrepreneurship and help you retain ownership of your company. Startup loans can provide the capital necessary for launching your business while retaining the majority of equity.
If you’re a small business owner looking for capital to fund a specific project or expansion, you’ll need to decide what kind of business loan is best. Various forms of business financing are available, and they can be tailored to meet a variety of business needs.
Entrepreneurs have access to a variety of business loans, including Term loans, Business lines of credit, loans, Equipment financing, Invoice financing, and Commercial and Real Estate loans, as well as Microloans, Personal business loans, and more.
Startup pitch competitions are a great way to show your startup to investors, develop your brand and story, and, eventually, attract funding. You get to pitch to multiple investors, gain some valuable feedback, and gain some good exposure by participating in such an event.
Pitch competitions also offer a great opportunity for business validation and customer validation.
Startup pitch competitions are a great way of boosting your startup career and help you become better at public speaking.
You’ll also meet interesting people and make some solid connections. Pitching competitions are an excellent way to gain visibility, funding, and exposure for startups. They provide an opportunity for creative entrepreneurs to stand out and share their business ideas in a competitive environment.
There are several reasons why you may want to enter a pitch competition. The most obvious reason is that pitching to an audience is a good way to practice your elevator pitch and make sure you’re as prepared as you can be for any other meetings that may result from the competition.
Globally, there has been a new wave of startup pitch competitions popping up left and right over the past few years. There are many startup pitch events held all over the world for you to participate in.
Several startup pitch competitions have gained traction and notoriety around the world, such as Y Combinator Demo Day, TechCrunch Disrupt, HATCH Pitch, Web Summit Pitch, and more.
Friends & Family:
Startups in need of a small cash infusion can turn to friends and family for help. They’re willing to invest in you because they believe in you as a person as well as your business. Several of the most successful startups in recent years received their early boost from friends and family. Friends and family financing is a strong way to get your startup off the ground.
The benefits make it an obvious choice: the money comes without the complicated, lengthy investment process and with no strings attached. Friends and family can be extremely generous but they also expect to see returns on their investments. This is why you must have a solid business plan in place before even attempting to secure seed funding.
Getting friends and family to invest in seed funding allows a startup to get through the first few months of operations so that it can recruit its first employees, rent an office, and acquire key resources. Raising money from family, friends and personal networks of acquaintances is a common practice among startup founders.
When you face financial problems or company difficulties, a bank loan can be a valuable resource. However, what if you aren’t able to meet the requirements for a bank loan? There is still a way out. Microfinance business loans refer to financial assistance given by microfinance providers or NBFCs to small businesses that lack access to traditional sources of financing.
Microfinance is not only about extending loans to individuals with no formal collateral. It also encompasses businesses that need to be financed but don’t have any security or collateral assets. Microfinance can go a long way in helping small and medium businesses secure all the funding they need to continue operating as well as expand and grow their business.
Microloans are provided by an institution serving micro-entrepreneurs as opposed to banks that serve big business, and the underwriting process is done with its focus on the entrepreneur and business plan rather than on collateral.
These can be for small things like upgrading your equipment or buying raw materials to improve your business.
Trading equity for services in your business, as an alternative to paying cash, often seems like a great idea to startups who are short on cash. Equity trade can be a tempting option when a startup carries out a high-priced development and there is a limited budget.
In exchange for services, developers or service providers receive equity shares and have the opportunity to become part of an emerging business.
By trading in equity, rather than having to pay cash upfront, you can agree to exchange your business’s equity for the rights to intellectual property or services provided by those you are working with. The parties involved can benefit from this if it is handled properly, resulting in a win-win arrangement.
Although there are risks and pitfalls to be aware of, free money can be a crucial component of your startup’s early success.
Equity provides entrepreneurs with greater flexibility in funding, especially when they are short on budget. Startups commonly take advantage of this funding option to avoid getting buried by hefty upfront payments.
Entrepreneurs and business owners all over the world will jump at any funding opportunity they come across. However, It’s important to balance all the different strategies and determine what your startup needs are. It’s crucial to remember that fundraising is a serious business.
Not as serious as making an actual product or service that people want and need, but still pretty serious.
Even if you get an influx of cash in the beginning, it’s not smart to spend a lot of capital when you don’t need to.
At the end of the day, it’ll be your name on it. If you want to maximize your chances of success with fundraising, make sure to consider all options and decide what will work best for you and your business.