The Ultimate Cheat Sheet On Startup Funding
So you’ve had an idea; planned it out but you’re now faced with the most challenging part, executing your plan. A lot goes into starting and growing a business; you’ll probably be spending late nights and early mornings forging your idea into a reality, and a successful business. Unfortunately, the financial element is often the biggest hurdle. More specifically, your funding.
Whether bootstrapping or going through a Series C round on funding, we’ve created the ultimate cheat sheet on funding your startup.
. Types of funding
Boot-trapping
BootStrapping is by no means the easiest method of funding your startups; it’s often actually the most difficult due to the restrictions and limited resources. Bootstrapping boils down to using your funds which could be your savings or your weekly/monthly income to fund your business. It’s entirely feasible, particularly at the start where costs are low and outgoings manageable on a very tight budget.
The benefit here is that you maintain 100% equity in your business as you develop it. You’re able to mould it in the way you want without having to answer to a partner or third party. There are also no pressures adding on with meeting others’ deadlines.
However, it’s worth noting that this can be quite stressful, especially with your savings, as the risk of failing rests entirely on you. Many if not most startups begin this way, at least in the short term. It’s essential to keep costs as low as possible until you can create an MVP (Minimum Viable Product) that opens up your funding options.
Small Business Loan
There are some small business loan providers available to the savvy entrepreneur. You’re able to maintain 100% ownership and control of your business while getting the funding needed to grow. The downside to this, of course, is that you start your business owing money and with added pressure to make enough to cover the payments. Furthermore, many banks that provide these small business loans have infinite numbers of requirements, a budding entrepreneur and their startup must fulfil.
When starting up, it’s difficult to organise and plan your business and related business activities to a good enough extent to meet bank requirements. On top of this, startups will need to give a complete description of how they intend on spending the loan; this is often difficult to spell out at this stage.
Angel Investor
Angel Investors are persons or groups of persons who intend to provide funding to startups. They are similar to venture capitalists but operate on a much smaller scale. Angel Investors can come with a wealth of knowledge, especially if you find one with experience and connections in the industry in which your startup will operate within.
This type of funding comes with the drawback of losing equity. Often Angel investors request equity shares in your business to maximise their returns; Of course, an Angel Investors primary motivation is to make a profit on their investment. They can request anything from 10% to 49% equity in your business, so it’s important to ask yourself whether or not you’re willing to share ownership of your business, before going down this road of funding.
Venture Capital Investor
Venture capitalists are similar in some ways to Angel Investors, however as mentioned before, venture capitalists operate on a much larger scale and tend to be a larger group of individuals who have come together to invest for profit. They specifically deal with funding startups and provide resources to help them grow, making significant investments in fledgeling businesses.
Venture Capitalists may be an attractive route to funding, the idea of getting millions to fund your business and possibly benefiting from the wealth of experience resources these groups can provide, however, this comes at the expense of control and equity. Venture capitalists are often heavily involved in businesses they fund, at times to the extent of having a say in day-to-day management decisions.
Startup Incubator or Accelerator
Startup Accelerators and Incubators have been increasing in popularity in the past few years, and the numbers of them have been growing exponentially. It’s relatively easy to join one, and many local governments and councils have supported their growth.
The primary focus of Incubators and Accelerators is to offer support and resources as a pose to just funding. Though many do provide seed funding, they also provide office space, mentorship and either industry-based or small business advice. You’ll often find they work in conjunction with universities.
Crowdfunding
Crowdfunding is all the rage at the moment, with new and innovative ideas of utilising crowdfunding for different business cases, one of these is funding your business.
Anyone can donate to your business idea and businesses that have a particularly good hook, or innovative approach can do very well via this route. There are some platforms available for this funding option, sites like Kickstarter being more tailored to new inventions and those like seeders for more traditional businesses.
You can also choose your platform based on what you’re willing to provide investors (members of the crowd) in return. The returns offered can be anything from an early delivery of products or gifts (Kickstarter) to monetary returns or shares. The key here is the amount of equity you’re willing to relinquish in the case of giving shares, will not be as much as of that for venture capitalists or angel investors. Crowdfunding is a useful method of gaining smaller amounts of funding.
Crowdfunding is a highly competitive funding source so having a compelling story for yourself and your business will be key, as well as having a good business idea.
Local and National Grants
These are often an excellent source of funding; they come with no requirements for sharing ownership so an entrepreneur can remain in 100% control of their business. These grants often come with the bonus of support.
These grants often come with a multitude of hoops to jump through as the business, as well as those within it, must conform to an often extensive list of requirements.
Using grant money to fund your business is often an attractive option because you don’t need to pay back a grant in the way you would a loan.
How to get funding
Attending networking events is a must, often Venture Capitalists and Angel Investors will meet new prospects in these types of events.
Get your business organised, if you can get a stable stream of income or customer base to prove a potential success. This helps with all forms of funding.
Try to ensure your team is established in their field, showing that you have an expert team can often be enough proof of potential success for investors.
Document a clear business plan and objectives this will help investors to understand where your business is heading and whether your visions will align.
If you’re a student try to find an adjoining accelerator or Incubator, as mentioned above, they often work in conjunction with universities so you’d be at an advantage when applying.
What’s best for you
This depends on what your priorities are, if your most interested I high growth and don’t mind sharing your business ownership, then Venture capitalists are the best option while if complete ownership of your idea is the key sticking point for you, consider a combination of bootstrapping and joining an Incubator or Accelerator.
Deciding which way you’re going to fund your startup is quite simple. Match your present and future needs with that of your chosen funding option. Evaluate your choice carefully as whatever you choose you're likely to experience effects on your business long term.
As always, Happy Small Business Marketing!
Resources
For more on marketing strategies for startups and marketing strategies for small businesses.