Business funding is one of the core fundamentals of building a startup. If you want your new business venture to succeed and survive in the long term, you must have the financial resources necessary to get your business up and running. While many different forms of business funding can be used today, the following are five of the most common options:
Friends & Family
If you're looking for the pre-seed or seed funding, and have friends and/or family that are interested in financially supporting your business venture, consider doing a friends and family round.
Friends and family loans or equity are a great way to get started with financing your business. But when you're asking friends and family for money, it's important to respect their time and investment in you, so always be very transparent and help them understand the risk. Explain your repayment or exit plan in detail, and make sure everyone agrees to it before you sign a written agreement.
The downside to a friends and family round is that if the business fails, it could negatively impact your relationship with this person.That's why it's essential to maintain open communication with them throughout the process and help them truly understand the risks associated with building a company, so they understand why they should or should not invest.
Angel Investment
Angel investments are the most common form of funding for startups. Angel investors are wealthy individuals who invest their own money in startups, but they also help founders start and grow.
Angel investors are most likely to invest in startup companies that show potential for growth and profitability. Angel investors usually require a business plan, pitch deck and financial model before deciding whether they want to invest in your startup.
They usually invest between $5,000 (micro-funding) and $1 million dollars (which is called mega-funding).
Angel investors don't require repayment in the traditional sense-instead, they take an equity position in your company. If a business is sold, later on, exit money is split between the angel investor and the startup's founder(s). You maintain only part ownership.
Crowdfunding
Crowdfunding is a new way to get your startup idea off the ground. You can pitch your idea online, along with additional information, and receive business funding from a multitude of sources from around the world.
Unlike traditional financing options, crowdfunding doesn't require repayment unless you're engaged in equity crowdfunding.
Crowdfunding has its pros and cons, but one thing is for sure; it's not the easiest way to get funding. it's dependent on multiple sources financing your project rather than establishing reliable funding from one source. Crowdfunding can be a saturated market; therefore, obtaining funding takes time and effort. You will be responsible for juggling multiple deals and investors to secure funding.
You will need a strong marketing campaign to succeed at crowdfunding. It requires a lot of work and planning before you begin your campaign and after you've raised money from investors. Two popular platforms for crowdfunding are KickStarter and Indiegogo.
Debt Funding
Debt is a type of funding that comes in many different forms but generally involves borrowing money from banks and private lender institutions and repaying it with interest at a later date.
Debt funding is an excellent way to get the short-term finance you need to grow your business.
After you've paid off the interest and repaid the principal, debt financing will no longer cost your equity i.e no change in your % ownership of the business.
Some of the cons are they can be hard to qualify for, and the application process can take time and effort. Monthly payments can make investing profits back into your startup easier. Newer startups may find it challenging to find startup loans due to a lack of longevity and credit issues.
Institutional Investors (Venture Capital)
The venture capitalist is a firm which invests money into the business. Venture capitalists do not use their own money in the business; instead, they use money from investment companies and funds, called limited partners (LPs).
VCs don't prefer to invest in companies that are not targeting large market opportunities and tend to invest in high potential startups to drive good return for their investors.
Since venture capital investments are made in exchange for equity rather than debt, your startup must promise the high-growth potential to secure this type of funding.
Venture capitalists are looking for a 3-10x of return on their investment, meaning they will want to see some payback from their investment. If you plan to grow exponentially, venture capital is likely the right choice.
In conclusion, you must understand the different types of startup funding and how each can benefit your business. Regardless of how much startup funding you need, you need to know as many options as possible when financing your business.
