Initiating a business requires a lot of effort and funding options. Many lucky entrepreneurs can cover most of the startup expenses on their own, but not all of us have this opportunity. Also, many people are unable to initiate the business instead of having great ideas, and this is due to the lack of funds that they have to leave them as only ideas.
In this article, we have discussed the various types of funding for startups that a new business person can opt for.
What are the funding options available to startups?
BOOTSTRAPPING
The concept bootstrapping means funding the business via utilizing personal funds, the use of the savings of the person, or a credit card. The owners that are putting personal funds on the market will eventually want to earn profits from it.
Pros
- It displays credibility and sounds attractive to future investors.
- Founders focus is more on the business rather than on the fundraising.
- Never reduce the control ownership for the shareholders.
- Better decision making.
Cons
- Since networks play a vital role in the business world, the option of not sharing equity with others can be a risk.
- Often not fruitful if the investment is not quickly achieved.
- Might reduce the growth rate in case of low funding.
- Depending on the owner’s capital, it could put him in a lot of extra stress.
- Possible lack of cash flow.
Before you begin bootstrapping, do consider the points mentioned above.
CROWDFUNDING
The name ‘Crowdfunding’ says it all. It can either be rewards-based or equity-based funding. New business people should enter the market with crowdfunding and see where it stands. Moreover, he can share the product in the market by adding incentives to the purchases. This is how he would be able to raise a sufficient amount of capital to cover the production of the product, as well as to learn about the market demand.
Indiegogo and Kickstarter are the most popular crowdfunding sites that offer startups a webpage and make the security concerns simple. An entrepreneur can use this webpage for setting the goal of their fundraising; create a fan/donor base by increasing brand awareness via social media platforms. In the past, there have been many successful companies that have adopted crowdfunding practice.
Pros
- Permits the company to cater to the production and shipping costs.
- If it is reward-based, it would never dilute the equity for the owners of the company.
- It attracts investors.
- It boosts brand awareness quickly via online platforms.
- Allows the startup to test their product: gives market validation (R&D) and customer data.
Cons
- The lack of funds might make it difficult for the startup to get the product to the market.
- Develops the risks of failure. These social campaigns are expensive.
Because of the cons mentioned above, many new business people avoid this option and move on to the next option.
ANGELS INVESTORS VENTURE CAPITALIST
ANGEL INVESTORS
Angel investors come during the startup’s early stages. The purpose is to invest in the business for growth. They commit to provide funds somewhere between $10k and $100k. As a matter of fact, the company can rise to millions of dollars.
VENTURE CAPITAL INVESTORS
VC usually enters the startups after the angels funding but before banks. The amount is something that a company is unable to collect via other sources, which is why they need to contact a VC firm for assistance. The thing to notice is that a VC can be both a person and a firm who usually invest a minimum of $500k in those businesses that have the potential to grow in the future.
After all, the goal of Venture Capitals is to fund initial startup stages and grow its value over time. For lending an amount, VCs normally get one seat in the company’s BODs.
Pros
- Ownership percentages are certain.
- No interest payments.
- They have uniform standards.
- Helps the startup to grow fast and effectively.
- Offers expertise for newbie’s to leverage.
Cons
- It requires more resources and time to obtain a deal.
- Handling over significant parts of equity to the VCs (investors).
- Transfers control to third-parties, which frequently leads towards more complex corporate governance.
A lot of new entrepreneurs benefit from both of these funding options.
4. ACCELERATOR & INCUBATORS
For the early stages, both options offer great ways to grow the startup.
Let’s dig in the right!
ACCELERATOR––MEANS GROWTH
A business accelerator program gives startups access to investors, mentorship, and other support that help a new business person to become stable and self-sufficient.
INCUBATORS
A business incubator is a company that provides an environment for startup companies to develop their ideas to initiate business. Economic development organizations, governments, or universities are responsible for sponsoring these incubators. As compared to accelerator programs, the incubators aim to achieve success faster.
Pros
- Incubators have VCs and mentors who have the experience to help startups to fund their ideas.
- Collaboration with other founders helps to grow a company fast.
- Both provide essential IT equipment and Wi-Fi to a new company for the cost-cutting purposes.
Cons
- Incubators would restrict entrepreneur limits, and he might not be in the center of the market.
- Giving up equity is the worst of all.
- Incubators are not a secure option. Here ideas can be duplicated.
Considering the above points, a business owner must choose one best option.
Which Type Of Funding For Startups Is Best For You?
Now that all pros and cons are clearly mentioned in this article, you can choose your funding option wisely. At first, you need to understand the needs of your business and its long-term goals. However, finding a suitable type of funding for startups is not an easy task, but you must research more about it. After all, you would soon need to come on the right track to success.
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