Money makes the world go around, and it’s also needed to start a business. Turn your idea into a commercial enterprise you will require investment. Plus, you’ll be spending it before your startup makes its first sale!
Every entrepreneur and business owner will tell you that raising money for a new business is challenging. You’ll be expected to back yourself, too, so make sure you have personal funds to commit to your startup.
How Do You Fund a Startup?
Let’s look at the options for funding a new business, starting with backing yourself with your own funds.
Self-funding, better known in the business world as bootstrapping is an effective way to fund your business.
Bootstrapping methods can include using your savings/selling assets, service or product presales, credit cards, or using other income to fuel your business.
Using these bootstrapping sources is the fastest way to raise funding. You don’t need to know how to format a business plan and you don’t have to go through the process of reaching out to investors and lenders.
In recent years, crowdfunding has become an increasingly popular funding method for businesses.
In short, crowdfunding platforms are set up for individuals and companies to pitch their business ideas, products and challenges to a community of individuals willing and able to support their ideas.
Crowdfunding works as follows. An individual will make a business pitch on a crowdfunding platform. They will share their business model as well as its potential growth. If crowd funders on the platform are interested, they’ll make a pledge to support the business model publicly and donate the appropriate funds.
Crowdfunding can be highly beneficial for some reasons. First, it allows you to communicate and connect with like-minded people who you likely wouldn’t be able to engage otherwise.
Additionally, crowdfunding can act as a marketing tool to generate interest in your business. Here you can begin to understand your business resonating with people and what isn’t, helping you improve both your product and your pitch. And, of course, most importantly, crowdfunding will help you raise money for your business.
An angel investor is a wealthy individual who has an interest in investing in privately-held businesses. Generally, they operate alone, but sometimes they may team up with other angel investors and form a fund. Many successful companies have used angel investors, such as Google and Yahoo.
A huge benefit of having an angel investor fund your business is that similar to bootstrapping, you typically do not have to repay the funding. Instead, the angel investor will take equity or shares in your business.
With this in mind, angel investors can be a great source of funding for your business. To get started with this, you must first have a solid business plan put together and a terrific pitch ready to go.
To get an angel investor on board, you are going to need to capture their attention with enthusiasm and promising data and statistics on your business’s current status and future potential.
Venture capital funds are managed and operated by professionals (known as venture capitalists or VCs) that provide equity funding to companies with great potential. Generally speaking, VCs invest in slightly more mature businesses than angel investors. They also often want more of a say in managing daily business operations and practices.
Venture capitals can be a great source of funding for your business, as they bring mentorship and expertise to the table. They can help evaluate your business from both a sustainability and scalability point of view.
Funding From Business Incubators And Accelerators
New startup companies can benefit greatly from using incubator and accelerator programs for funding. These programs assist hundreds of startup businesses each year and can be found in most major cities.
While incubators and accelerators are commonly used interchangeably, there are a few fundamental differences between the two. Incubators nurture startup businesses until they are big enough to make it on their own. Accelerators more or less do this as well, but they also help business progress quickly. In short, incubators nurture businesses while accelerators fast-track them.
Most incubator programs have a shared space in a coworking environment. Companies will often be invited to work in this same location, which can help each business learn from each other’s experiences as they refine their ideas and work on their products.
Although incubators do not offer any direct startup funding, they can still be a handy tool in bootstrapping your business, as the space provided will greatly help reduce your expenses while also receiving tips and advice from professionals.
Accelerators generally begin with an application round in which successful companies are chosen and invited to participate in a specific location. These companies will then participate in an in-depth mentoring program, which can last from a few weeks to a few months.
Accelerators also provide a network of investors and mentors to you and your business. Most programs will end with a demo day in which you have the opportunity to show investors your business. For example, the Y Combinator Demo Day is named the year’s most important event for Silicon Valley tech investors.
Typically, these programs run for 4 to 8 months and are definitely a time commitment for business owners. Both incubator and accelerator programs can help your business sustainably develop connections with mentors, investors, and other fellow startups.
Probably the most obvious source of funding for your business is bank loans. Banks will provide you with financial backing via loans if you approach them with a solid business plan that is well structured and conveys the profit forecast. Banks can provide traditional long-term loans or other types of financing like lines of credit and shorter-term working capital loans.
Raising funding from the sources mentioned above can greatly help your company grow. Although certain funding sources can be more useful for certain businesses, generally, it is most beneficial to access multiple funding sources. By using multiple forms of funding, you have more flexibility and options as you grow your business.