You can fund a startup in a number of ways. As a startup founder, you would need to think seriously about who you want to request funds from and when. Different funders need to be called upon at different stages in your startup journey. (If you’re trying to fund an idea for the business you already work for, the same point applies!) Below are a few methods to review before deciding on just how much investment you need and where you might need it from.
Not every startup founder is willing or able to look externally for a funder. Some rely instead on their own funds (usually savings). We call this bootstrapping. For a lot of businesses, bootstrapping is a viable and preferred method of funding; they don’t have to rely on paying back bank loans or giving equity away to external investors. Bootstrapping falters when a business needs a serious cash injection that goes beyond what’s sitting in the founder’s savings account. Successful companies that used bootstrapping as a form of starting their business include AirBnB and MailChimp.
Should an entrepreneur be unable to bootstrap or find early funding in the form of venture capital or an angel investment, the next viable entity for them is the first tier of funders – namely friends, family, and fools. Hopefully your friends and family believe in you, if not your business, and will be willing to help you in your journey. Their investments might not always be enough to catapult your startup to the point that you hoped, but it will certainly assist in the journey. You also might get some very useful feedback from them along the way!
Bank loans are another popular source of funding for entrepreneurs. We suggest you take what you learned in this module and really get your financial system in order before you approach a bank (or venture capitalists and Angel Investors). While taking a loan means you won’t have to give up control of your business, the downside is that regardless of whether your business succeeds or fails, you’ll have to pay back the loan.
You might have a certain assets that you would be willing to live without and sell to help raise capital to fund your business. This isn’t always easy, and it takes some serious consideration, but think about what you might be able to do without, see how much you might get able to get for it, and see where those funds could be used in your budget. If it makes sense and you’re willing to forgo whatever it is, then sell it.
Kickstarter was launched in 2009 and, over the past few years, has been the preferred crowdsourcing platform for over 105,000 projects and businesses that have raised over $2,3 billion. Other crowdfunding sites like GoFundMe also exist. Crowdfunding has become a very popular source of startup funding that works on the basis of small amounts of capital funds being invested by large groups of people via the Internet. Socially conscious projects and businesses have found crowdfunding to be an especially useful way to raise not only funds, but awareness too.
Angel Investors are usually wealthy individuals with a strong network who are predominantly interested in investing in early-stage startup businesses. Aside from investing funds in the business, Angel Investors are also interested in providing mentorship to startups. Although Angel Investors tend to invest only seed capital (limited funding), the guidance and support from these individuals can be invaluable.
Venture Capitalists (VCs) are different from Angel Investors. VC funding tends to come from a whole group of people – like a company or a board – and they are more inclined to invest in business that have moved beyond the startup stage. The funds they provide also tend to be substantially larger than what Angel Investors provide.
When you approach a VC or Angel Investors, keep in mind that every time you get funding, you are giving up a small (and in some cases large) piece of your company. This piece of the company is called equity.
Everyone who has a percentage of your business becomes a co-owner. While this has some great benefits, it also carries with it some dangers – so think carefully about who you ask for funding and who you allow to become part of your business.
Raising funds for your business will take time, so practice patience and perseverance. Remember to focus on the quality of the investors and the fit between them and your business. Don’t waste their time or your own by knocking on doors of interments firms that have no interest or involvement in the sector your business is placed in. Just like everything in the startup journey, raising capital is all about being strategic.