Sources of Start-up Capital
Start-ups are projects initiated by entrepreneurs to seek, develop, and validate scalable business models. Start-ups cost money from the ideation process of the project, scaling to selling or issuance of an IPO (initial public offering). Lack of funding is a serious issue for many entrepreneurs as it is a major reason why many businesses fail, particularly during inception.
Start-ups have been known to operate at high risks with less than 1% getting outside funding, according to research findings by fundable. They improve their chances by aligning internal structures to maximize operations and funding opportunities. Below are viable sources of funding that start-ups can utilize.
Self-funding, also known as bootstrapping, is one of the most popular sources of funding for start-ups. Bootstrapping mostly involves utilizing existing or user-generated funds, funds from family and friends appraising assets, or taking personal loans to finance the initial stages. Currently, self-funding is a viable option because of the steep reduction in the value of the initial investment and growth period witnessed in the last two decades.
The key to bootstrapping is utilizing non-scalable resources by maximizing human capital first. This is made possible by pursuing a start-up where your skills, background, and opportunity are aligned in order to build the value of the product from the beginning.
Crowdfunding is a method of funding start-ups by crowdsourcing finances from a large number of individuals or groups of individuals. Crowdfunding relies on numbers to raise the required amount. These funding campaigns are usually conducted on popular online platforms such as Kickstarter, Indiegogo, and Patreon.
The efforts and success of crowdfunding are dependent on presenting a detailed and comprehensive business plan that states what your start-up needs to progress. Crowdfunding can also either be equity-based, where backers have a stake in your business or rewards-based. Crowdfunding is a speedy and flexible way of raising funds for worthy start-ups. One of the main advantages of crowdfunding is that it can generate interest in your brand and products, assisting in marketing and brand awareness.
Angel investors are wealthy individuals or groups of individuals who invest money in start-ups or the early stages of a business. Angel investors usually provide second-round funding for growing profitable small businesses that need capital to reach their potential.
While angel investors may have varying interests in start-ups, they all only invest in small businesses that guarantee high returns or show great promise. However, many Angel investors are cautious with their investments due to the high failure rate of small businesses.
Venture capitalism involves pooling together funds from investment companies, pension funds, large corporations, endowment funds, and wealthy individuals to invest in a portfolio of usually high-risk start-ups. Venture capitalists typically take on projects they think will earn high returns.
Venture capitalists like Mark Stevens usually become involved in the business’s operations by lending their expertise with the aim of helping the business succeed. They achieve such authority by taking ownership, equity, or a seat on the board of directors. The ultimate goal for most venture capitalists is to list the business for an IPO. Start-ups that receive such funding have to be willing to share the decision-making authority with equity-holding venture capitalists.
Business Incubators and Accelerators
Business incubators and accelerators are resource facilities usually found in major cities, universities, and research centers. They offer critical support during a start-up’s progressive stages. The incubation and accelerator programs are meant to nurture and fast track business operations.
Admission to an incubation or accelerator program is not a guarantee for the success of a start-up. Start-up incubators and accelerators can get involved at any developmental stage of the start-up. Still, most choose to participate in the early stages when companies mostly benefit from outside assistance. Incubation and accelerator environs also offer the advantage of collaboration with other start-ups.
In the absence of investors or external support, taking a line of credit to develop your start-up can be a viable option. Credit financing involves presenting a well-structured business plan to a financial institution, indicating all your financing needs and working out a financing arrangement.
Start-ups on their own pose a higher risk of collateral loss than established businesses. Unlike with angel investors and venture capitalists who have to conduct screenings, the requirements for a line of credit are confined to your creditworthiness and ability to service the loan.
Other sources of funding for start-ups include product pre-sale, participation in startup-oriented contests, government programs, and think tanks. Government programs usually issue sizable grants for start-ups, the only downside is that they can take very long to materialize.
To stay competitive, you should interchange your funding sources for flexibility and reduce overdependence on one source of funding. This can help you avoid missing funding opportunities you haven’t explored yet. When sourcing for funding, you should also ask yourself how much financing you need, how long the finances are going to last, and the level of control you are willing to give up.