From the ideation stage to deploying the actual solution to the market, startup founders like yourself need to build synergy between several operation areas before arriving at the finished product. Getting every bit of your startup to work together will require adequate financial backing.
Since cash flow is one of the essential ingredients determining if your startup succeeds or fails. The kind of capital your startup requires depends mainly on the type of business your startup provides. Realizing why you need fundraising is one thing; another is determining the different ways to source the funds.
How to raise funds for my startup?
Several startups start developing their idea from bootstrapping funds together from personal funds. Founders usually have to fund their vision into reality via private funds, donations from family and friends, among other individual funding options.
In several common cases, self-funding is a first funding option for its many advantages. Top of these advantages is its flexible interest rate and the requirements for return. If the funds are coming from your pocket as a startup founder, you are tying any future return of the company to yourself. Investors consider this, as they know you are full time into making your startup idea into a reality.
Bootstrapping funds from your pocket, friends, and family puts less expectation on you as a startup founder. You can also keep more profit from your startup to yourself and reinvest back in your startup. Although this funding type is common for several startups, it is enough to get businesses like personal firms, consultancy services, and service businesses off the ground and running.
2. Angel Investors
Angel investors are sets of individuals with surplus funds and are interested in investing in startups. This network of individuals often works as a network of personal financers that screens founders’ proposals before investing. Startup founders show more interest in fundraising with angel investors because of their personalized opportunities. Founders get mentorship, expand their network, and get the funds to run their startup.
Angel investment usually occurs in the early stage of growth for most companies. Prominent companies like Google, Alibaba, and Yahoo are examples of companies with angel investment funds. Angel investors are open to taking more investment risk on new ideas with their funds for a return of up to 30% equity of the startup that wants their capital. Investment from angel investors usually ranges between $10,000 and $250,000, depending on the proposal and the startup.
Accelerators and incubators provide startups with the workspace to work from, business advice on how to grow their startup, respectively, and provide resources, training, and capital to startups with the potential to become profitable. At some point, you will require to move your operations from your garage to a larger space to accommodate your startup’s operation.
These accelerators or incubators get their capital from industrial and enterprise organizations, universities, individual companies, and corporations giving back to society. Some accelerators do not require equity or return on investment for their program. The startups that participate in these programs receive capital support and network with other startups.
However, some privately-owned accelerators or incubators may demand an equity stake in your startup if you request funds. Some famous accelerators that you might already know include Y combinatory, 500 startups AngelPad, Alchemist, and others.
4. Venture Capital
The most common fundraising option at this point is via venture capitalists. These professional investors are constantly scouting for startups that promise to be profitable in the nearest future. Typical venture capital investments are in the millions or more. Besides venture capitalists’ funds to startups, several other benefits come with this opportunity.
Control is an important aspect to consider when selecting the venture capital you are going into business with to receive funds. Venture capitalists seek and exercise their substantial control over startups. Usually, controlling stock in the startup is a requirement before investing. Understanding the amount of control that the agreement from VCs stipulates is important for startup founders.
Furthermore, VCs provide:
- Management expertise.
- Bridge important mentorship.
- Help startups to scale and sustain growth.
- Appropriate funds for your business.
Usually, fast-growth companies with a solid exit strategy showing their rapid revenue growth get the funds from a venture capitalist. Venture capitalists should be your target if you desire to collaborate with considerable funds to scale your startup.
Your prospective venture capitalist is going to make demands of your startup. However, the interest of your startup and the venture capital you are planning to receive funds from should align. Ensuring that your startup’s interests and theirs align is vital to move towards the same goal.
Alternative fundraising opportunities
In the following lines, we will consider new and alternative fundraising opportunities for startups to raise funds for their business. Note that these different alternatives largely depend on factors like nature of business, country, size of capital, etc.
1- Pipe Upfront Capital Schemes
This fundraising option provides capital for businesses that already have some recurring revenue. Startups can capitalize on this fundraising opportunity by presenting their recurring revenue numbers to get capital upfront. The money is repaid monthly with a little bit of interest on top. Pipe provides a one-click instant payout platform that converts your current recurring revenue into upfront capital.
Pipe is a founder-friendly fundraising financial instrument that is non-dilutive with its capital scheme. It provides the option to startups to scale fast without dilution with the capital it provides.
Crowdfunding is more or less like receiving a loan from a pre-order from more than one person. This lump sum is necessary to sustain a startup operation through their first or second prototype. This option is becoming more popular because it builds the startup’s popularity within a community of people and the funds it can generate within a short period.
In raising funds from crowdfunding, startup founders need to give a detailed description of their startup, their goals and milestones, revenue projections, and reasons they need the funds for their startup. After reading the proposal, people who show interest in the startup can pre-order the product or donate to the startup.
Crowdfunding is multifaceted, as it not only raises funds for your startup; it simultaneously creates that awareness and interest in the people that read your proposal. Even if they do not donate or pre-order your product or service, they know about what to expect from your startup in the future. This is a competitive alternative to raise funds, as it requires your proposal to be airtight. However, it puts funding of ideas in the hands of people with slight strain on the startup.
3. Business Grants
Grants are lifesavers for several small and medium-scale businesses. Grants are primarily from government programs and private organizations to provide funding to startups and struggling businesses. The government understands that startups, small and medium scale businesses employ more people in society. Funding startups and small businesses through grants are a way to develop specific sectors of the economy, provide employment opportunity, and keep these businesses alive.
Private organizations give these grants to startups researching some areas they are interested in but are not willing to commit to it. In some cases, these business grants are part of corporate social responsibility from these private organizations.
As a startup founder, you can take advantage of the different business grants from the government and private organizations in your locality. Your startup must be doing some societal good in some areas that interest the government or private organizations in receiving this grant. A good example is Tesla Inc., the saving grant from the government was because they had an interest in green energy.
However, the handful of business grants often come with some limitations on accessing the money. These limitations come from the expectations or goals that accompany these grants.
4. Partnership and Licensing
Striking a fruitful partnership deal with enterprise companies that are willing to finance your startup is an excellent alternative to funding your startup. So, you are creating a solution that a larger establishment needs but do not have the resource to put a separate team together to develop the solution. In this scenario, a mutually benefiting partnership takes care of both parties.
Here, your startup gets the funding it requires to continue developing its solution while the enterprise company gets to solve its problem with your startup’s solution. The funding from this arrangement can come as an advance or pre-order of the solution your startup is developing. This advance can help you scale up your production and operations. This kind of advance also provides several advantages for your startup, like enterprise customer, supply chain, and marketing strategy.
However, this funding alternative also comes with its unique limitations. For example, your partner may require some licensing of your solution to their company alone. This limits the number of customers that your startup can service. Other partnership agreements can also limit the kind of business that your startup can take up. It is crucial that you consider all the partnership details and licensing before signing some necessary rights away.
Microfinance banks and other microloans are available to startups and small business owners to maintain their business operations. From traditional banks, they require some collateral or business assets as a guarantee for the loan before receiving approval. Getting approval from microfinance or venture debt companies requires little or no collateral.
If your startup can show some steady revenue generation, you can open your credit line and get the funds that your startup needs to scale. Microfinance loans are increasingly popular because what you need to provide as a startup founder is little compared to other funding alternatives.
However, this funding alternative slates how much interest you would have to remit over a given period. It also clearly states the penalty for defaulting on this loan. If your startup already sees steady revenue generation and needs funds to scale production, this fundraising alternative fits that description.
6. Trade by Barter
Fundraising may not be in the form of physical cash. Your startup may require space to run your operation, and you could trade your service with other establishments for your immediate need. For example, your startup may need office space. You can exchange your IT skills with the company that needs IT service in return for using their office.
Trading your services for the current need of your startup is something you can consider. Funds are not changing hands directly, but the cost savings from this barter can be helpful in other areas of your startup.
A source of capital is vital to scale your startup to some degree. When looking for funds to scale and maintain your startup, you need to understand your startup needs and the market opportunities available to your business. The different options above are worthy of your consideration.
Although there are many fundraising opportunities, it is your responsibility as the startup founder to understand what your business needs and get the appropriate funds necessary. When you are getting ready for your fundraising activities, strategically prepare to get these funds to secure your startup’s future.
Keeping your investors and major stakeholders informed about your metrics progress is a crucial communication skill that we at Fundrs.VC value the most. Stay tuned and will help you ace those communications while keeping an eye on what’s important the most.