Ken Anvire, CEU iLab
October 8, 2020
Today this article will speak on a few ways how startups can be funded. Research have indicated that a relatively high numbers of startups have utilized one or many of the methods that are going to be discussed in this piece. This is not a step by step guide, rather a pronounced look at the various methods being used to fund startups and how their operational stratagems.
Very important technique that refers to building a company from the ground up with nothing but personal savings, luck, and the cash coming in from the first sales. The pros of that method are that you are able to retain total control of the business and make all of the decisions; can be a way to start slowly bringing in revenue and establishing a safety net that will fund future investments in the business. This method allows business owners to experiment more with their brand, as there is no pressure from investors to get the product right the first time
The cons are that pressure might come from the personal or family asset that are being put on the line by the entrepreneur.
Lack of credibility is also another negative factor affecting this method. The backing of respected investors can automatically give a business higher visibility and greater respect from vendors and customers.
If you would like to get practical advice on how to bootstrap your company, see our article here.
It is without saying that, when you first start with a business venture, friends and family might be the first resources to look at in order to receive funding. One needs to acknowledge that, depending on the relationship level you have with your family members, trust would be a major factor that would work in your favor, ultimately leading your family and or relatives to lend you sufficient capital to commence your startup . It’s quite important to mention that because being unknown when embarking in such an adventure, other funding sources might be very reluctant to provide you funding. This (family/ friend) area of funding might not be able to provide you a lot of money (depending on their financial situation). However, this is the first step one might want to look out for when you have no connections within the industry because you are just now getting started. It is without saying that certain negative traits can be associated with this( family/ friend) funding method because, depending on the relationship you have with your family, they might be reluctant to critically analyze your business, fail to mention where you should or could improve your business model due to the fact that they might not want to hurt your feelings etc. In addition to that, if you family risks some money into your venture, and the venture fails to produce a revenue, you might strain the relationship with your family. It is something that needs to be considered.
The second source of funding worth mentioning are banks and government agencies. They provide loans for early stages of your startup. As the business progresses, they could offer larger credit sums – (we could understand by that business credit cards with larger credit limits etc. ) Government agencies on the other hand could provide you some grants, which more often than not, come with stipulations / restrictions that may be put forth.
An angel investor is an individual who invests in a new or small business venture, providing capital for start-up or expansion. Angel investors are typically individuals who have spare cash available and are looking for a higher rate of return than would be given by investments that are more traditional. Angel investors usually come in and provide capital for a startup in exchange for either ownership equity or convertible debt into the startup. Their presence is quite often observed in the beginning stages of the startup venture; especially when other investors might be reluctant to engage with the venture due to its lack of notoriety.
For more background on angel investors, read our article here.
These are extremely important in the startup realm when it comes to funding. They are the “industries” that provide the most investment money to your startup. When associated with them, you automatically gain more credibility and visibility. They more often than not participate in the series A, B and C rounds of funding (which are later round fundings- when your structure has acquired enough solid basis), leading to the IPO or sell of the startup. Series A stock is the first round of stock offered during the seed or early stage round by a portfolio company to the venture capital investor. Series B is the second round of funding done through investment including private equity investors and venture capitalists. Series B round generally takes place when the company has accomplished certain milestones in developing its business. Series C funding is focused on scaling the company; growing as quickly and as successfully as possible. A venture capital firm goes for this round of funding when the company has proved its mettle and is a success in the market. IPO or Initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. Public share issuance allows a company to raise capital from public investors. The transition from a private to a public company can be an important time for private investors to fully realize gains from their investment as it typically includes share premiums for current private investors. Meanwhile, it also allows public investors to participate in the offering.
Corporations also invest in startups. They do so because they see a number of benefits they could rip from it. Not only could their revenue share grow, they also seek to identify technology and talent that would help them compete in their respective markets – helping them grow and accumulate profits. Corporations therefore have their own accelerators and incubators that startups could participate in.
Ultimately, there are various funding avenues one can explore to get their startups going. As the startup grows, different sources of capital will be needed and become more advantageous than others.
Making sure you are aware of the difference between the funding’s type is crucial to understand, as the different stages of your startup reaches, it will require you to get in touch with or target a different type of investor.
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