What funding options are available for my startup business?
I believe this is a popular question for all those involved in the startup world.
At the same time, we all heard the famous news revealing that the majority of startups will fail in their first year of activity. Though there are several reasons this happens, one of the most revealing is the lack of money.
Call it financial support or funding options, it doesn’t matter. When you have no money to keep the business going, all product innovation, online marketing tricks and the exciting journey into unknown suddenly reach a dead end.
So, one of the biggest issues affecting entrepreneurs since the beginning of time is how to get the money to build the dream.
Getting money to support your startup is not an easy task, but it’s also not impossible if you have a good business model and you know what funding options are right for you.
Here are 8 popular funding options for startups looking to get money and support their business growth.
8 Ways to Raise Money for your Startup
Such a popular word in the startup world which simply means that you actually have to take money from your own pocket in order to support your startup company. As they say in the industry, you have to find the 3 FFF (family, friends and fools) to take money from.
Bootstrapping is usually about making the best of it with not so much money and stretching your resources. It is a good thing to start like this in the initial phase of your startup company.
It is obviously not the best option for entrepreneurs, but we have to underline the great advantages that also come along with self-funding:
- You avoid the formal/legal headaches;
- You preserve your independence as you are not yet worried about an investor’s interests and you don’t have to report to one;
- You continue to take the big decisions and preserve the vision since you (and your founders) still control the business development;
- Things go fast since there aren’t yet multiple interests to be served;
Crowdfunding is one of the most popular funding options lately and it’s just like everybody is using it, while popular crowdfunding sites like Kickstarter, RocketHub, GoFundMe or Indiegogo attract more and more startup entrepreneurs on their platforms.
But let’s not jump ahead and try to understand what crowdfunding is.
Startup entrepreneurs or people who simply want to fund their projects – such as doing a movie – go online and place a description explaining why exactly they need that money for. They mention where the money will be used and how much they actually need in order to accomplish the project.
Readers (customers) can read the project description (should we call it pitch?) and they decide if they like the idea or not. If they do buy into the project and they believe the idea could work, they support it by donating a sum of money.
Of course, startup entrepreneurs asking for money can also raise the bar and offer something in return at a later moment, such as branded materials or the actual product/ service if successful.
There are some obvious advantages when using crowdfunding:
- Good for marketing purposes as you generate interest online;
- Check firsthand the business idea: if not much interest is displayed to your idea, maybe it won’t work;
- Avoid working for big investors’ attention (and money);
- Compete with other startup ideas on the platform and see if you can draw average people to your startup/project;
When talking about angel investment people usually think about an entrepreneur’s closed relatives or friends.
Normally, angels are rich people who provide money that come as a one-time investment to help the business develop or an ongoing investment that can support the new company in its early stage period.
A big difference from later investors stands in the favorable terms which focus on starting the new business. Basically, angels are there to help startups kick off the business growth.
There are several names for angel investors, such as informal investors, angel funders or seed investors. Some act as individuals or are part of a larger investor network that can request equity or not. They can also contribute with capital to a startup via crowdfunding platforms, where they have the possibility to actually see if a new business idea attracts other people from the platform.
Since angel investors help startups in their early stages (seed period), there is a big risk of losing the investment. For this reason, professional angel investors check startups for a clear exit strategy, an acquisition plan or maybe an IPO (initial public offering).
4. Venture capital
Venture capital is provided by large private companies that look to offer financial support to startups that display high development potential and have already proved an ability to grow fast in the market.
Venture firms that offer capital or funding options investment to early stage companies normally require some equity or ownership stake in the companies they choose to support.
The main difference between venture firms and angels stands in the purpose of their activities. Venture capitalists have high hopes the supported startups will become successful and they will be able to benefit from the eventual exits (IPO), mergers or acquisitions.
Venture capital is attractive to companies looking to raise serious funds in order to continue supporting their growth and we are talking about much more money than it could be obtained via angel investing and crowdfunding.
The catch is that big investments bring big financial risks for venture capitalists, so they compensate the uncertainty by obtaining a higher level of control and influence over the startup’s future evolution.
Successful startups like Uber, Airbnb or Didi Chuxing are backed-up by venture firms which contribute with financial support, strategic advice and business model strategies.
5. Tech Incubators and Accelerators
Many startup businesses often join accelerators or incubators programs in their early stage periods.
Both accelerators and incubators are designed to help startup companies grow by providing multiple services, from co-working spaces and training classes to mentoring and networking.
In theory, the main difference between an incubator and an accelerator is that an incubator helps a startup walk the first steps, while accelerators are meant to permit startups grow very fast.
Incubators and accelerators are useful for startups because they facilitate business connections with people from the industry and they make things smoother for people looking to attract investors.
However, there are tech incubators that run complete screening processes of the accepted startups in order to determine their financial needs and supply them with the required capital.
6. Bank loans
You want to build the next successful tech online-based company in the market, but who says you can’t go the old-fashioned way of asking money from a bank?
These days banks have adapted to entrepreneurs’ needs and can generally offer two types of funding options, such as loans and funding for specific businesses.
As you build a startup business, you would be interested to find a bank offering funding for your specific business model.
If you do take this path, you will have to convince the banking consultants that your startup business has a good growth potential by disclosing to them your business plan and all the necessary details of your project.
7. Government programs
Since the IT industry has been on a constant rise throughout the world, governments and local authorities started to support SMEs and online-based startups with various programs designed to facilitate access to funding options.
This is the case in Malaysia, where tech entrepreneurs can require financial assistance from development programs such as Cradle Investment Programme that is funded by the Ministry of Finance.
Cradle Investment Programme comes with a substantial grant for innovative tech startups that have a great commercial potential.
Another name to be mentioned is MDeC Pre-Seed Fund that has been introduced by Multimedia Development Corporation (MDeC) to develop new startup businesses into commercial projects. This program brings additional benefits to startups who apply by offering mentoring services and co-working spaces.
These are just some funding options programs run by the government in Malaysia right now, but the list could be longer to involve other companies that are backed by the state authorities.
8. ICOs (Initial Coin Offerings)
Initial Coin Offerings have become a popular way of collecting money and we should do justice and include them in our list.
But, let’s see first what an Initial Coin Offering is: An ICO is a mechanism used by a company to raise financial support by selling cryptocurrencies in exchange for money. ICOs can be related to angel and seed funding than to later stages of funding options.
To make it easier to understand for people not familiar with the cryptocurrency trend, an ICO is similar to on IPO (Initial Public Offering) where investors are able to purchase shares in a company.
Though this topic requires a separate article (and we should come back to this subject), we have to understand the main advantages that occur from an ICO versus the venture capital raising:
- In an ICO, the company keeps the money resulted from the tokens sale and do not have to include the buyers into the board of management preserving the ability to maintain control over the company’s future decisions;
- The initial buyers of crypto tokens can also be the initial customers of the company, so the ICO could be considered as a good sales and marketing opportunity;
However, to conclude, we have to say there is also a great degree of risk as there is no well-trodden path for the cryptocurrency world and no clear regulations have yet been established, not to mention the major fluctuations of digital currencies.
All businesses depend on financial support and funding options are essential for all startups.
Though you can start your startup company by bootstrapping, sooner or later you will need to grow in order to reach your business objectives.
So, leaving aside your tech requirements and your marketing strategy, you need to establish as soon as possible how much financial assistance you need and what are the best funding options for your company.
The way you prepare for your funding does influence your business evolution in a large degree as you’ll have to consider the relationship between your company’s founders and the investors or partners who choose to believe in you.
If you are looking for financial support, technical and marketing expertise, plus great mentoring and networking options, our company is ready to assist you. If you have the right ideas, we have the right tools. Contact us and let’s talk business.