Over 90% of startups fail in the first year, and 38% are due to a lack of funding, and this is the lion's share of the failure rate.
The stat here puts into perspective the importance of funding for a startup. These modern times have blessed us with a plethora of options and the luxury of choosing the best ones that fit us. If you have an excellent idea for a startup, there is also the probability that investors will find you.
Either way, funding is necessary for a business to succeed, but the real challenges lie in where and how you acquire the necessary funds. To help you answer these questions, we give you this detailed guide on finding funding options.
Go right ahead and learn how to find your investor!
Table of Contents
Finding a source of funding is essential for your startup’s growth. Relying on your savings or liquifying any assets you have is also not a best option. Mainly you will need funding for the following reasons:
- Working capital
Not having enough capital for the necessary business expenses can cause a severe financial crunch in your business. A loan can cover the short-term funding problem, but it is not a permanent solution, and it will affect your scalability.
- Buying assets
You need money to keep the ship afloat and upgrade it. Keeping up with the growing technological advancements requires investment. This is essential for the growth of your business.
- Debt restructuring
At the initial stages of your startup, there would be situations where you need to take loans or borrow capital to grow your business. These debts can make your financial planning hard. Finding investors or any other means of funding can be a big help to ease your financial burden.
Bootstrapping, also known as self-funding, is probably the most prominent type of funding at the initial stages of a startup. When you are launching a startup, it's challenging to find sources of funding without showing some traction or potential for growth.
So you take matters into your own hands and dip into your savings or gather the required capital from friends or family. Fewer formalities and probably fewer interest rates while borrowing from kith and kin is an added advantage.
Bootstrapping is optimum only if the initial investment is small. Some businesses need investment right from day one.
Crowdfunding is taking a loan, contribution, pre-order or investment from more than one person simultaneously by posting a detailed description of your business on a crowdfunding platform.
Posting a detailed description of your business with a clear business plan, goals, the investment needed etc., will attract customers and make pledges to pre-order the product or give donations if they genuinely believe in the idea.
The positive side of crowdfunding is that it helps market the product and allows ordinary people to fund prospective ideas. But always remember to provide a clear picture of your business so that commoners can understand your business.
Angel investors are wealthy individuals who are keen to invest in promising startups. Angel investors have helped many big companies like Alibaba, Google, and so many more in their early stages of growth. They also help with mentoring young entrepreneurs in addition to the capital they provide.
Angel investors sometimes work in groups to filter proposals and find profitable investment options. They give investment executing sizeable equity of the company, and they prefer to take risks to get higher returns.
Venture capitalists or venture capital firms are people who professionally manage funds to invest in startups with huge potential. They provide mentorship expertise and evaluate the growth of the business.
Venture capital investment is ideal for a business that has passed the startup stage and is already generating revenues. If you have a fast-growing company with an exit strategy in place, you can opt for this investment strategy. Check out the strategies to quickly grow your company.
Most venture capitalists often look to recover their investment within a short period. So if you have a product that takes a longer to reach the market, grabbing the attention of VCs will be hard.
Incubator and accelerator programs help hundreds of startups gain traction in the market. This is an excellent source of funding for startups in their early stages.
Incubators and accelerators are similar in terms of the service they provide. But accelerators help the startups take a bigger leap in their business goals.
Incubators nurture the startups like offspring by giving them the essential services to help them grow. Dropbox is a company that has taken off with the help of an accelerator programme.
Techstars Boulder Accelerator, Techstars Seattle Accelerator, Founder Friendly Labs and AngelPad are some of the best accelerator programs in the US.
The hike in contests and tech conventions is a humongous opportunity for new startups. They provide many options to raise funds and encourage entrepreneurs to grow their businesses.
Winning contests has sizeable prize money for the winners, but to win, you need to present your idea in a way it stands out. It should be clear as to convince investors to invest in your company.
The added advantage of these contests is that they provide ways to spread the word about your product or business plan through media coverage. This helps you gather funding from professional investors.
For example, Extreme Tech Challenge is the world’s largest startup competition for purpose driven companies.
7. Bank Loans
Entrepreneurs usually turn to the bank when they think about funding options. Banks typically offer two types of financing, working capital loan and funding.
A working capital loan is given to run one revenue-generating cycle, and this limit is calculated by hypothecating stocks and debtors. Funding from banks is a normal loan sanctioned after you propose a potential business plan and valuation details.
NBFCs are non-banking financial corporations that provide banking services. They do not fall under the definition of a bank or a banks legal requirements. For the entrepreneurs who failed to secure a bank loan, NBFCs provide financial services.
Business loans through NBFCs are popular among people with poor credit ratings and those who require limited funding.
You need to be aware of various grants offered. There are Government grants which you can access through websites. If you could meet the eligibility criteria, these grants are a great funding source.
Small business administration portals and small business lending fund portals where you could visit to get an idea of new opportunities.
If you are looking for quick funding options, there are a few. It might not work for everyone as it involves selling assets or borrowing money.
Pre-sale: Selling your product before launch is a highly effective way to get funds quickly. These actuals help to understand the product's demand in the market and gather funds.
Selling Assets: Though it seems a bit harsh, selling assets like land, cars etc., can help your business gather quick funds. You can always repurchase them after your business succeeds.
Line of credit: A line of credit is an unsecured steady source of funding where the borrower can gather funds from the line of credit loan accounts. Credit cards are a great tool for a business owner who wishes to gather funds immediately but always keep in mind the card rates and interests while taking out your credit card.
Though debt financing is considered a dent in the financial plans, it can be employed when you need immediate funding. So there is no right or wrong. It depends on you.
For every startup business, its requirements are different, so there is no perfect source of funding. You have to evaluate your business plan and decide which type of funding your business needs
Finding the right source of funding can be the catalyst your business needs to succeed. After reading this blog, you should know that you have at least 9 other options if one fails.
"Ask, and it shall be given you; seek, and you shall find; knock, and it shall be opened unto you."