Starting a new business or introducing a new product or service in the market requires capital investment. Capital is the bloodline of any business, whether small, established, or start-up. While established businesses can easily raise capital, start-up founders struggle to accumulate funds no matter how powerful their business ideas or models are.
Initially, start-up founders rely on their own capital or borrow money from friends or family, but there are other effective ways to raise capital that one must be aware of.
Wondering what are the ways to finance a start-up? Here are the top 5 ways to finance your start-up.
Angel Investors:
Angel investors are high-net-worth individuals who provide funds to promising start-up companies in exchange for equity or royalties of the business. Here, the percentage asked for equities may vary from one investor to another.
Angel investors are involved at the early stage of a business, usually at the ‘seed’ or angel funding phase. These investors can invest as individuals or a group, collectively reviewing and examining a business before investing in it.
The investment made by angel investors is a one-time investment that helps businesses take their first step, i.e. start the business, or it may support an ongoing business through its difficult stage.
Angel investors, also known as angel funders, seed investors, and business angels, work with a high-risk and high-reward investment strategy. If a start-up fails, it can end up in a huge loss for investors. On the other hand, if the business idea works, it can result in an enormous profit. The favourable terms and ease of availability make angel investment a viable and first preference for start-up founders.
To attract angel investors, start-up founders must pitch their business ideas and models, proving their worth and potential to investors. Founders must create a sound business plan, demonstrate a solid understanding of the industry, and present a clear path to profitability. Additionally, founders must have strong communication and negotiation skills to convince investors to provide funding.
Venture Capital:
Start-ups appear in the competitive business arena with robust business ideas and models and require money to convert those ideas into successful products. To meet this capital demand, budding businesses can opt for Venture Capitals.
Venture Capital is a type of financing that an investor offers to start-up companies with the potential to show long-term growth or companies growing rapidly and requiring more money to expand.
Venture Capitalists invest money at different stages of a company, including an early or seed stage, and release funds at once or in rounds in exchange for equity in the company. These investors or firms raise money from banks, funds, and corporations. While investing in any start-up or business, they thoroughly investigate the submitted proposal, concerning the company’s business model, management, product, and other things.
Budding businesses willing to finance a startup through venture capital must remember that VCs have the power to influence decision-making or monitor business progress before providing additional funds. Further, they can guide budding businesses to ensure profitable growth.
Venture Capital firms may cease to fund after 4 to 6 years after the initial investment through merger, acquisition, or Initial Public Offering.
To attract venture capitalists, start-up founders must show their worth through a solid business plan, a comprehensive market analysis, and a clear path to profitability. Founders must also have strong communication and negotiation skills to convince investors to provide funding.
Start-up Business Loan:
Funding and cash flow are essential for every business. A budding business needs capital to start the business and maintain daily operations smoothly. For this, they can rely on various financing options. One such effective funding solution is a start-up business loan.
A start-up business loan is a type of financing offered by financial institutions to new businesses or those starting a new venture. This funding can be used for a variety of purposes, such as purchasing equipment or raw materials, managing expenses, or leasing a building. Invoice discounting is an example of a start-up business loan that is effective in providing the necessary funds.
Read here to know: 6 Key Factors to Consider before taking an Unsecured Business Loan.
Crowdfunding is an increasingly popular method for financing start-up businesses. This approach involves securing funding from a large number of individuals and institutional investors through a trustworthy crowdfunding website. To initiate a crowdfunding campaign, start-ups must create a profile on a crowdfunding site and describe their business, as well as the amount of money they hope to raise. The campaign serves as an excellent PR tool, creating a sense of urgency for potential investors and encouraging them to invest in promising business ideas.
It can take various forms, including reward-based and equity-based crowdfunding. In reward-based crowdfunding, start-ups offer products or services or provide discounts without giving away equity, while in equity-based crowdfunding, start-ups sell stocks in exchange for cash. This allows start-ups to choose the crowdfunding option that best suits their needs.
Incubator and Accelerator:
Another option for startups looking for funds is to turn to startup incubators or accelerators. Startup incubators provide entrepreneurs with the opportunity and facilities to acquire real customers, such as physical resources and mentorship. To avail these facilities, startups must go through an application process that varies from program to program.
Most incubator programs include a comprehensive business training program, information/educational sessions, industry mentors, keynotes, and networking events. On the other hand, startup accelerators are short-term programs that provide both financial support and training and mentorship. Through these programs, entrepreneurs can introduce themselves to global networks with other businesses and gain traction in the real market.
Startups have to go through an application process similar to that of startup incubators to participate in these programs.
In summary, it can be difficult for start-ups to secure funding from traditional lenders who tend to favor established businesses with a track record of success. However, start-ups can explore alternative financing options that are popular and effective in raising capital for bringing innovative business ideas to life.
