STARTUP FUNDING
Startup funding — or startup capital — is the money needed to launch a new business. It can come from a variety of sources and can be used for any purpose that helps the startup go from idea to actual business.
According to a recent study, over 94% of new businesses fail during first year of operation. Lack of funding turns to be one of the common reasons. Money is the bloodline of any business. The long painstaking yet exciting journey from the idea to revenue generating business needs a fuel named capital. That’s why, at almost every stage of the business, entrepreneurs find themselves asking – How do I finance my startup?
Now, when would you require funding depends largely on the nature and type of the business. But once you have realized the need for fund raising, below are some of the different sources of finance available.
1. Friends and Family
Many startup founders turn to their friends and family to help them with initial funding. After all, those are the people that already believe in what you’re doing — you don’t have to convince them the way you would a VC, angel investor, or bank.
Friends and family can be a great source for getting started, but it’s important to make sure that the business part of the relationship is clearly outlined. Get legal documentation for everything and make it clear to your loved ones that they may not get any return on their investment at all. Some entrepreneurs choose to avoid this type of startup funding because of the potential personal complications.
2. Angel Investors
Angel investors are individuals with surplus cash and a keen interest to invest in upcoming startups. They also work in groups of networks to collectively screen the proposals before investing. They can also offer mentoring or advice alongside capital.
Angel investors have helped to start up many prominent companies, including Google, Yahoo and Alibaba. This alternative form of investing generally occurs in a company’s early stages of growth, with investors expecting a upto 30% equity. They prefer to take more risks in investment for higher returns.
Angel Investment as a funding option has its shortcomings too. Angel investors invest lesser amounts than venture capitalists.
3. Venture Capital
This is where you make the big bets. Venture capitals are professionally managed funds who invest in companies that have huge potential. They usually invest in a business against equity and exit when there is an IPO or an acquisition. VCs provide expertise, mentorship and acts as a litmus test of where the organisation is going, evaluating the business from the sustainability and scalability point of view.
A venture capital investment may be appropriate for small businesses that are beyond the startup phase and already generating revenues. Fast-growth companies like Flipkart, Uber, etc with an exit strategy already in place can gain up to tens of millions of dollars that can be used to invest, network and grow their company quickly.
However, there are a few downsides to Venture Capitalists as a funding option. VCs have a short leash when it comes to company loyalty and often look to recover their investment within a three- to five-year time window. If you have a product that is taking longer than that to get to market, then venture-capital investors may not be very interested in you.
They typically look for larger opportunities that are a little bit more stable, companies having a strong team of people and a good traction. You also have to be flexible with your business and sometimes give up a little bit more control, so if you’re not interested in too much mentorship or compromise, this might not be your best option.
4. Crowdfunding
Crowdfunding is a method of raising capital through the collective effort of friends, family, customers, and individual investors. This approach taps into the collective efforts of a large pool of individuals — primarily online via social media and crowdfunding platforms — and leverages their networks for greater reach and exposure.
Traditionally, entrepreneurs spend months sifting through their personal networks, vetting potential investors, and spending their own time and money to get in front of them. With crowdfunding, it’s much easier for entrepreneurs to get their opportunity in front of more interested parties and give them more ways to help grow the business, from investing thousands in exchange for equity to contributing $20 in exchange for a first-run product or other reward.
5. Bank Loans
The bank provides two kinds of financing for businesses. One is working capital loan, and other is funding. Working Capital loan is the loan required to run one complete cycle of revenue generating operations, and the limit is usually decided by hypothecating stocks and debtors. Funding from bank would involve the usual process of sharing the business plan and the valuation details, along with the project report, based on which the loan is sanctioned.
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