Money – Bringing Ideas to life…
Starting a business is an exciting endeavor, but it can also be a daunting one. Raising enough funds to get your startup off the ground is often the biggest challenge entrepreneurs face. Fortunately, there are plenty of options to help you secure the funds you need to get your business up and running. In this blog post, we’ll take a look at 7 ways to raise startup capital for your business. From venture capital to crowdfunding, each of these methods can help you secure the funds necessary to launch your startup. Starting a business is an exciting endeavor, but it can also be a daunting one. One of the most common challenges for entrepreneurs is finding the funds to get their startup off the ground. Whether you’re looking for a loan or investment from a venture capitalist, there are a variety of ways to acquire the funds necessary for your business. In this blog post, we’ll explore 7 effective strategies for raising startup capital for your business.
Self-funding, also known as bootstrapping, is an effective way of startup financing, specially when you are just starting your business. First-time entrepreneurs often have trouble getting funding without first showing some traction and a plan for potential success. You can invest from your own savings or can get your family and friends to contribute. This will be easy to raise due to less formalities/compliances, plus less costs of raising. In most situations, family and friends are flexible with the interest rate.
Self-funding or bootstrapping should be considered as a first funding option because of its advantages. When you have your own money, you are tied to business. On a later stage, investors consider this as a good point. But this is suitable only if the initial requirement is small. Some businesses need money right from the day-1 and for such businesses, bootstrapping may not be a good option. To summarize, there are three different types of capital: equity, debt and working capital. Equity is common in venture capital deals where investors purchase shares in the company in exchange for cash investment (investors share percentage) or other forms of equity consideration. Debt investments take many forms but typically involve lending institutions making loans to companies at a fixed interest rate for a set period of time (e.g., 10 years). Working capital refers to what a company needs today – on an ongoing basis – in order to cover expenses until it generates enough revenue on its own to cover expenses and pay off debts
2. Friends and Family
If you’ve been following along in this current series I’m writing on early stage startup operations, there’s an important reason why this is the 32nd article in most cases, founders – especially founders of a web/mobile software company – should do everything they can to formulate, validate, build, and release their idea as a product/service into the world without spending money.
While of course, this takes a ton of work (and a fair amount of luck) to get right, not paying for services in the early days should be your goal. Instead, focus on recruiting a co-founding team, building out the features of your product/service together, and marketing your company effectively to gain user/customer traction while leveraging free resources and compensating your team with equity.
3. Government Programs & Grants
The Small Business Innovation Research (SBIR) grant program
The Small Business Innovation Research (SBIR) grant program was launched to encourage small businesses and startups in the United States to work with the country’s search and development (R&D) which can benefit government bodies and federal agencies.
The grant is monitored by the U.S. Small Business Administration (SBA), which is a body also known for overseeing SBA loans.
To be eligible for the grant, you must meet the following criteria:
Be a for-profit organization
Be located in the United States
Have a workforce of at least 50% US residents
Have no more than 500 employees in total
The Small Business Technology Transfer (STTR) program
The Small Business Technology Transfer (STTR) program shares a number of similarities with the SBIR program. In fact, its motivations are exactly alike: to fund SMEs who can contribute to research and development which can aid federal agencies in the future.
The main difference with the STTR program, however, is that it requires applicants to work with a non-profit research institution.
The Economic Development Administration (EDA) Build to Scale (B2S) program
The Economic Development Administration (EDA) is part of the US Department of Commerce and offers grants to startups and SMEs via their Build to Scale (B2S) program. The program consists of two separate awards given to winners of the Venture Challenge and the Capital Challenge. As well as a financial award, the grant also helps winners acquire office space and hire new employees.
To participate in either competition, you must first get in contact with your local state government.
The Small Business Development Centers (SBDC) programs
The Small Business Development Centers have several programs formulated in partnership with the Small Business Administration (SBA) and, for the most part, alongside an academic institution.
These programs consist of mentorship, the offer of free marketing, generous funding and the option to take business-related educational courses.
Any startup or SME located in the United States can apply. To do so, contact your home state economic development agency and inquire about the SBDC program.
The Research and Development (R&D) tax credit incentive
The R&D tax credit incentive is a federal corporate tax incentive allowing SMEs to counterbalance part of their corporate taxes with research and development (R&D) expenses.
In the past, the US R&D tax credit could only be applied against corporate taxes. However, it has recently become available to startups, SMEs and medium-sized businesses.
Crowdfunding is one of the newer ways of funding a startup that has been gaining lot of popularity lately. It’s like taking a loan, pre-order, contribution or investments from more than one person at the same time.
This is how crowdfunding works – An entrepreneur will put up a detailed description of his business on a crowdfunding platform. He will mention the goals of his business, plans for making a profit, how much funding he needs and for what reasons, etc. and then consumers can read about the business and give money if they like the idea. Those giving money will make online pledges with the promise of pre-buying the product or giving a donation. Anyone can contribute money toward helping a business that they really believe in.
Why you should consider Crowdfunding as a funding option for your business:
The best thing about crowd funding is that it can also generate interest and hence helps in marketing the product alongside financing. It is also a boon if you are not sue if there will be any demand for the product you are working on. This process can cut out professional investors and brokers by putting funding in the hands of common people. It also might attract venture-capital investment down the line if a company has a particularly successful campaign.
Normally, banks are the first place that entrepreneurs go when thinking about funding.
The bank provides a couple of financing options for businesses. One is a working capital loan, and the other is funding. A Working Capital loan is the loan required to run one complete cycle of revenue-generating operations, and the limit is usually decided by hypothecating stocks and debtors. Funding from the bank would involve the usual process of sharing the business plan and the valuation details, along with the project report, based on which the loan is sanctioned.
In the US, sites like Kabbage can help you get a working capital loan online in minutes. Unlike traditional lenders, Kabbage approves small business loans by looking at real-life data, not just a credit score.
6. Angel Investors
Angel investors are individuals with an abundance of cash and high interest to invest in upcoming startups. They also work in groups of networks to take advantage of others’ expertise to filter out weak proposals. They sometimes offer mentoring or advice alongside capital.
Angel investors have helped to start up many impactful companies, including Google, Yahoo and Alibaba. This other form of investing generally occurs in a company’s early stages of growth, with investors expecting a up to 30% equity. They prefer to take more risks in investment for higher gains.
Angel Investment as a funding option has its downsides too. Angel investors invest less amount than venture capitalists as we will discuss in next point.
7. Venture Capitalists
This is where you make the big bets. Venture capital are professionally managed funds that invest in companies that have huge potential. They usually invest against equity and exit when there is an IPO or an acquisition. Based on years of experience VC’s share their expertise, mentorship and they acts as a litmus test of in which direction the organization is going, evaluating it how sustainable and scalable it is.
A venture capital investment are more appropriate for small businesses that have gone past the startup phase and already generating some kind of revenues. Fast-growth companies like AirBnB, Uber, etc who have an exist strategy in place can gain a huge sun of money that can be used to invest, network and grow their company quickly.
However, there are a few downsides to Venture Capitalists as a funding option. VCs have an obligation towards their funds and often look to recover their investment within a 3- to 5-year time window. If any startup has a product that is taking longer than that to reach the market, then venture-capital investors may not be very interested in it.