According to a recent survey, nearly 94 percent of new companies fail in their first year. One of the most common causes is a lack of funds. Money is the lifeblood of every business. The long, arduous, but exciting path from concept to revenue-generating company necessitates the use of capital as a fuel. As a result, entrepreneurs ask themselves, “How do I fund my startup?” at almost every point of their venture.
This detailed guide will walk you through ten different funding options for startups that will assist you in raising capital for your company.
- Bootstrapping Your Startup Business
Self-funding, also known as bootstrapping, is an effective method of financing a startup, especially when you are just getting started. Without some momentum and a roadmap for future success, first-time entrepreneurs often struggle to obtain financing. You can invest from your own funds or solicit contributions from family and friends. This will be simple to collect due to fewer formalities/compliances, as well as lower fundraising costs. In most cases, relatives and friends are amenable to negotiating an interest rate.
Due to the advantages of self-funding or bootstrapping, it should be considered as a first funding alternative. When you possess your own funds, you are inextricably linked to business. Investors see this as a positive point at a later date. However, this is only appropriate if the initial requirement is minimal. Certain companies need funding from the start, and bootstrapping might not be a choice for them.
Crowdfunding is a relatively new method of funding a startup that has grown in popularity recently. It’s analogous to simultaneously soliciting a loan, pre-order, donation, or investment from multiple parties.
This is how crowdfunding works: An entrepreneur creates a concise overview of his company and posts it to a crowdfunding site. He will outline his business’s objectives, profit margins, the amount of financing he requires and why, and so on, and then customers will read about the venture and contribute money if they like the concept. Donors may make online donations in exchange for the promise of pre-purchasing the product or making a donation. Anyone may donate money to a cause they believe in.
Why should you consider Crowdfunding as a source of funding for your business?
The best part about crowdfunding is that it can raise awareness in addition to financing, which aids in promoting the product. By placing funding in the hands of everyday people, this method will eliminate the need for skilled investors and brokers. Additionally, if a business has a particularly good campaign, it will draw venture capital funding in the future.
Additionally, bear in mind that crowdfunding is a competitive environment for raising funds, and unless your company is completely rock solid and can capture the interest of average customers with only a summary and a few photos online, you may find crowdfunding to be ineffective in the end.
Indiegogo, Wishberry, Ketto, Fundlined, and Catapooolt are some of the most successful crowdfunding platforms in India.
- Angel Investment
Angel investors are people who have excess cash and a strong desire to invest in emerging businesses. Additionally, they collaborate in networks to screen plans jointly before investing. Additionally, they may provide mentoring or guidance in addition to capital.
Numerous well-known firms, including Google, Yahoo, and Alibaba, were established with the assistance of angel investors. This alternative form of investment typically occurs during a business’s early stages of growth, with investors anticipating a stake of up to 30%. They tend to take greater chances with their investments in exchange for better returns.
Angel investment as a source of financing is not without its drawbacks. Angel investors usually contribute less than venture capitalists.
- Venture Capitalists
This is where the major wagers are placed. Venture capitalists are professionally run funds that invest in high-growth businesses. They usually invest in businesses in exchange for equity and exit when the company goes public or is acquired. Venture capitalists provide experience, mentorship, and serve as a litmus test for the organization’s direction, measuring the business’s viability and scalability.
A venture capital investment could be suitable for small companies that have progressed beyond the startup stage and are now producing revenue. Fast-growing companies such as Flipkart, Uber, and others that have an exit plan in place will earn tens of millions of dollars that can be used to invest, network, and scale their business rapidly.
However, there are a few disadvantages of using Venture Capitalists as a source of financing. When it comes to corporate loyalty, venture capitalists have a short leash and mostly try to recoup their investment within a three- to five-year time frame. If the product takes longer than that to market, venture capitalists will be less interested in you.
They usually seek out larger opportunities that are more secure, with a strong team of people and significant momentum. Additionally, you must be versatile with your company and sometimes relinquish some leverage, so this might not be the best choice if you are not interested in excessive mentorship or compromise.
- Business Incubators and Accelerators
Businesses in the early stages of development should regard Incubator and Accelerator programmes as a source of funding. These services, which are available in almost every major city, assist hundreds of startup companies each year.
Though the words are sometimes used interchangeably, there are a few basic distinctions between them. Incubators act similarly to a parent to a child, nurturing the company by offering housing, supplies, instruction, and a network. Accelerators are similar to incubators, but an incubator assists/nurtures a business in walking, while an accelerator assists/nurtures a business in running/taking a giant leap.
These services usually last four to eight months and involve the business owner’s time commitment. Additionally, you will be able to establish beneficial relationships with mentors, investors, and other startup founders through this forum.