Let’s face it. No matter how good your idea is, you need money to get things going. Unfortunately for most entrepreneurs, there aren’t many ideas that don’t require any capital whatsoever. As your startup grows, you will eventually see how crucial extra funds can be to help your startup move to the next phase of growth.
There are many ways you can get your startup funded, but there are three standard categories that are generally agreed-upon:
Bootstrapping is basically anything to do with your own personal savings, borrowing from family and friends, maxing out your credit cards, offering equity for money etc… The main idea behind bootstrapping is saving money but it also helps you zero in on how you want to build your business and grow without outside intervention. In other words, you are keeping most of the business “shares” to yourself.
2. Equity Funding:
The basic definition of “equity” is having a claim or a stake in something, and in this scenario, a startup. Companies that take some time to get off the ground usually require a bit of equity funding. Reasons ranging from the inability to make regular debt payments to being able to support a payroll of 5 employees, are just some of the reasons why a few entrepreneurs will opt for equity funding.
Additionally, you get mentorship as well as access to the investor’s network – a key to getting places. However! Equity funding, of course, comes with a downside – you’re going to have to give up a bit of your ownership in the company and in the worst case scenario, some control as well.
3. Debt Financing:
Debt financing is exactly what it says it is – obtaining capital that you have to eventually pay back. Perhaps the easier option to come by in terms of funding since you will find more lenders as opposed to equity investors. Even though it is debt, remember, once you have paid off the debt, you have the share, and not an angel investor.
Not everyone, however, is cut out for funding, and those who are not – we recommend you cut corners where you can and invest your personal savings. Do the hard work yourself. It’s a risk. But if you have started a startup, you have taken many fearless risks already haven’t you?
If you already know how to market your startup, we can now get started with learning how to raise capital for your startup by breaking down the three types of funding we have mentioned above:
It’s natural to want to keep as much control of your company. That way, not only do you have sole ownership by barring outside investment but you are able to pay full attention to the product. There are plenty of success stories for startups that opted for bootstrapping: Appsumo, Mashable, Github, just to name a few.
A bootstrapped startup is basically a showcase of how resourceful the entrepreneur and his co-founder/s are, how they can achieve traction with as little initial capital as possible. There are several things founders can resort to:
1. Government Grants
There are lots of programs out there that offer government grants for businesses. Small businesses can easily avail them by either a simple google search or calling up government business support branches and learn more information through them. You can look for grants on multiple levels: private, local and national.
Grants can vary as well and can include:
– Direct grants which is basically straight cash in the bank.
– You can also ask for “Soft loans”, a kind of loan where the terms of repayment are less harsh as opposed to the terms of a normal bank for instance.
– Repayable grant is an interesting one. If your venture is a successful one, you will have to pay back the grant in sums determined before the grant is given. If, however, your venture does fail, the grant is written off. A kind of a win-win situation isn’t it?
– You can also get access to shared office spaces, free accounting and tax services. There are also free or sometimes very inexpensive basic development courses being offered. You could learn to build your own website!
2. Friends & family
For most of us, family and friends are whom we turn to in every situation. Having your own business venture is no different. It’s quite common for entrepreneurs to seek out help of close family members or family friends whether it’s a service or in this case, raising capital. Of course, there is pressure to not lose all the money your family and friends invest in your business. And the reality is, most startups fail, so you might just not be able to pay them back.
It’s obvious but the pros and cons as well as the risks the people in your life are taking with their money should be openly discussed with them. If your family and friends are willing to offer the funds anyway, the way to structure their rounds of capital is by offering them “convertible notes”. In other words, structured loans with the purpose of converting to equity.
3. Startup Incubators
An incubators’ sole purpose is to provide an environment for startups to grow which includes funding. Either a government or a university initiative, incubators also offer a robust network of angel investors, high speed internet access and is usually located at the heart of the hustle and bustle of most other large businesses. A lot of incubators are run by large multinational corporations such as Sony, Samsung and Google.
Simply put, crowdfunding is raising a round of funds by asking a large number of people to invest a small quantity of money by using the internet. You have access to thousands if not millions of people online on websites such as Kickstarter, GoFundMe, and Indiegogo just to name a few. Besides getting funding, you get free market validation as well as marketing. With the voice of a million people, you will know right away whether your idea is strong enough to succeed. The different types of crowdfunding are donation, debt, equity and reward.
1. Startup Accelerators
Think of an accelerator as the second stage to an incubator. Of course, businesses aren’t bound to be a part of both one after the other – you have to choose. Generally, however, accelerators take startups that are at a later stage. In other words, accelerators “accelerate” the growth of startups. They have a variety of programs, from advice and mentorship to real-world training on business, technical and fundraising subjects.
So how do accelerators work? They generally acquire a small chunk of equity in your startup (5-10%) in exchange for a small amount of funds ($20-30k) and admission into the accelerator. On “Demo Day” startups pitch to a number of investors who have gone through the same process. Success is defined by the most funds raised.
2. Angel Investors
Angels are rich individuals who seek to invest with interesting and on-their-way-to-success ventures. These rich persons can come in all shapes and sizes and certainly, all kinds of sectors. The most preferred sector, of course, is the tech industry. They have a vast network of connections that can help you but at the same time aren’t bound by law or the burden of exits. Angels are known to diversify risk by co-investing with other angels they know. The mobile industry is growing at an increasing pace with angel investments.
3. Strategic Investment
Strategic investment can take a variety of forms: the investor might want to grab equity in the startup or the investor might place an advance order on the product your startup is selling OR it could be a combo of the two. Point is, it’s a strategic business decision on the investors’ part. Strategic investors are generally more open to price-points – they’re not that stingy. Other benefits include an operating partnership, additional business pipelines, and extra industry expertise.
4. Venture Capital
VCs are investment firms that specialize in helping companies grow to obtain maximum financial ROI. Those who sit at the VC table are generally seasoned entrepreneurs who have been though the process countless times and usually know whether or not a startup will be a success or a failure. Even though VCs have a vast portfolio they are also under pressure to get quick return on investment through exit strategies.
Don’t confuse venture investors with venture capitalists – the two are quite different. One is an entrepreneur investing his/her funds for equity in a startup, the other (VC firms) are similar to mutual funds or hedge funds. In other words, they invest large amounts of money that is someone else’s. Those who manage these vast funds are called “general partners” and receive close to 20-25% of any of the fund’s earnings.
5. Public Markets
The basic definition of an IPO is when a company’s shares are sold to institutional investors who in turn, sell those shares to the general public as securities. AKA, the end-all dream for entrepreneurs. It is, however, an extremely stressful process as it includes a substantial commission for the bankers backing the securities as well as rules and regulations that take the fun out of fundraising.
6. Investment Banking and Private Equity
What Private Equity (PE) firms conventionally do is buy companies, provide debt financing, and change the structure of the company by outsourcing, layoffs, and other cost-saving techniques to resell the company in private or public markets for revenue. The key difference between PE firms and VC firms is this: the former focuses on financial performance of mature companies and makes operational, strategic, as well as structural changes while the latter focuses on young businesses that are seeking more growth and more funds to sustain that growth. In some instances, a PE firm can prove to be a stronger financial partner than a VC firm – it all depends on the needs of your companies.
Startups might encounter difficulty obtaining bank loans due to their extensive requirements but governments in most countries offer provide some kind of lending systems to inspire entrepreneurship and encourage the economy to grow. You can learn more about loans at your nearest government Business Support Institution and see whether there is a loan scheme specifically geared towards startups.
2. Convertible Debt
Convertible debt has terms that the money loaned to a startup can eventually be converted into something financially useful. When a startup receives a loan, instead of accruing interest on the loan, the creditor agrees to a term such as having a share in the company in the future or converting the loan into its cash equivalent. Convertible debt is surprisingly a preferred method of quite a few startups.
The basic benefit of this method is to put off valuing an idea to a later stage when more investors are involved and the product is further along in its lifecycle. Putting a value on an idea is difficult, subjective and tedious. Therefore, a lot of professional angels definitely put a convertible debt offer on the table among other options.
These are the basic categories entrepreneurs can choose from when trying to raise seed capital. Whether you opt for bootstrapping to save some money or take some risks by obtaining a loan or better yet, you have a network of Angels at your call, there are multiple ways you can raise capital. The point is to do it smartly and do it depending on what your startup needs require.