planning for startup funding
Planning for startup funding for a new business

Startup Funding: Ultimate Guide to Startup Funding for Every Business

Venturing into a new business is an exciting venture that comes with its own kind of challenges. The top of the list of the worries that comes with starting a business venture is getting startup funding to get their operations off the ground stage and sustain growth. Obtaining startup funding is quite complicated and a clear understanding of the different platforms startup funding can come from is required, and ways to approach potential investors is also mandatory.

Types of Startup Funding

1. Bootstrapping

This type of method of gathering startup funding involves funding oneself through personal savings or revenue generated from the business. One of its major advantages is giving the owner full control of the business.

Advantages of Bootstrapping for Startup Funding
  1. Equity Control: retaining full ownership and decision-making power.
  2. No Outside Approval: no intruding on the business affairs from outsiders.
  3. Clean Capitalization Structure
  4. There is an avoidance of repayment of loans with potentially high interest rates.
  5. There is no pressure from external sources.
Disadvantages of Bootstrapping for Startup Funding
  1. It results in a slower development of business
  2. Since the decision-making and ownership are on one person, he takes on more financial risk.
  3. Also, most times, finding capital can be very challenging.

2. Family & Friends

Family & friends are usually the first source of funding for raising small capital for a developing one's business and getting startup funding. The method though, should be treated professionally, if possible, using legal means to avoid complications and personal conflicts.

Advantages of Getting Startup Funds from Family & Friends
  1. In this method, you still have full control over the business.
  2. Trust is also a key factor here because they trust that the business will deliver.
  3. There is a form of motivation and excitement when loved ones support a new project.
Disadvantages of Getting Startup Funds from Family & Friends
  1. If there be a downward spiral of the business, not only the savings of the owner goes but also that of those close to you.
  2. These incurred losses can cause strain in personal relationships and in turn, affect the quality of life.

3. Angel Investors

Angel investors are individuals who provide startup businesses with seed money in exchange for a piece of the business which usually takes the form of equity or royalties. Angel investors play an important role in startup businesses. Digging a little into history, angel investors injected approximately $25 billion into 70,000 companies, thus, helping entrepreneurs get startup funding and bringing their ideas to life.

How Angel Investments Work
  • Seed Money: Seed money is one given to a business owner to start his business. Angel investors invest at the pre-seed, seed, or early stage of a company’s development.
  • Equity Stake: as a result of their investment in the business, the angels typically take minority equity stakes in the startup
  • Exit Strategy: they expect a return on their investment through an eventual exit, such as sales of the company or an initial public offering.
Why Get an Angel Investor?

Unlike the conventional financing system, an angel investor gives terms that is more favorable and the angel investor does not expect to get the money back unless the idea succeeds. Mostly what they desire to get is an equity stake and a seat on the board.

Their main aim is to help startups take their first steps in the business world rather than focusing on getting a favorable return on a loan.

Where to Find Angel Investors
  • Angel investors can be found online on websites like AngelList.
  • Also, they have their groups and networks such as the Angel Capital Association, Angel Forum, and Life Science Angels.
Advantages of Angel Investors for Getting Startup Funding
  • Angel investors' mode of generating startup funds offers a very low-risk level.
  • An angel investor can in turn become a mentor to the business owner
  • They offer credibility to the business in the industry
Disadvantages of Angel Investors for Getting Startup Funding
  • The angel investor platform gives less equity to the business owner
  • The may be much pressure on the business owner as the angel investor expects a substantial return on their investment.
  • Most angel investor takes a hands-on approach towards the business they invest in thus giving less control over the business for the business owner.

4. Venture Capital

Venture Capital is a form of private equity that provides startup funding for startup companies and small businesses that have the potential of attaining long-term growth. Venture capital usually originates from investors, investment banks, and financial institutions. Financing here usually comes in the form of private equity (PE).

Types of Venture Capital
  • Pre-Seed: Transforming a business idea into a concrete business plan falls under this type. Pre-seed is an early stage of business development where one can enroll in a business accelerator to secure early funding and mentorship.
  • Seed Funding: this also known as seed funding or seed capital, is a form of financing provided by private investors for startup businesses. In return for the investment, an exchange in the form of equity stake in the company is made or a share in the profits of a product is gotten.
Advantages of Venture Capital
  • There is no need for security
  • Venture capital offers an expansion opportunity
  • They are helpful for building networks
  • Businesses funded through venture capital have access to large capital
  • There is usually no obligation to pay the venture capital
  • They are generally trustworthy
  • They can help with hiring and building a team.
Disadvantages of Venture Capital
  • The process involved in approaching a venture capitalist is quite tedious
  • The decision-making process of venture capitalists is usually really long
  • The growth expectation of the company is high
  • The founder’s ownership stake is reduced

5. Crowdfunding

Crowdfunding involves the gathering of startup funding from the public with the intention of starting up a business. It is usually a supplement to other forms of raising capital funding for startup businesses.

Types of Crowdfunding
  • Reward-based Crowdfunding

This involves the contribution of funds to a startup in exchange for a reward. This reward usually comes in the form of a product or service of the company involved. This is usually implemented for startups that are launching a new product or service and need funding for development or production.

Advantages of Reward-based Crowdfunding
  • There is no equity sacrificed
  • This kind of funding enables one to assess market interest in your product or service.
  • It indirectly gives one business a pre-sales of the product and also helps generate publicity.
Disadvantages of Reward-based Crowdfunding
  • Most crowdfunding platforms do not give any money if the funding goal is not met, this operation is called all-or-nothing.
  • Since payment is made by reward, it is important to deliver on the promised rewards which can be time-consuming or costly than anticipated.
  • This kind of startup can cause the risk of your idea being stolen.
  • Equity-based Crowdfunding

Here, the investors receive a share of your business in return for their investment. Businesses with high growth potential are usually funded through this platform, as it allows them to raise larger amounts of money in exchange for a stake in the company’s future profits.

Advantages of Equity-based Crowdfunding
  • It enables new businesses to have access to a large number of potential investors.
  • It is a democratic form of financing.
  • It is a very flexible form of financing compared to the others.
  • It is quite a transparent form of financing.

6. Government Grants and Loans

A government grant is defined to be a financial award given to beneficial businesses with high potential by the federal, state, or local government authorities that do not require repayment. These grants serve various benefits one of which is the stimulation of economic growth. It's another avenue business owners can get the startup funding required to lift their business from its infantry stage.

Advantages of Getting Startup Funds from Government Grants and Loans
  • This grant does not require payback. They are just donations from the government to an organization.
  • This type of grant is widely available for everyone and to various industries.
Disadvantages of Getting Startup Funds from Government Grants and Loans
  • These kinds of grants are only stable for a short period of time. Relying on it is not advisable
  • Since it covers a very wide range, it is highly competitive.

Learn more about Government Loans and Grants here

Ways to Approach Investors

Before approaching your potential investors, it is very important that you already have a well-created strategy. One of the important first steps to take is establishing a strong network early on. Once you have a network that is beneficial to your business, you will need a clear and compelling pitch; it should be tailored to the particular investor you’re pitching to. Most people make the mistake of using one pitch for every investor they come in contact with. Be sure also to explain your business idea, its value, its importance, and most importantly, how the investor will gain from giving you start-up funding.

 

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