10 different sources of Start-up Funding – Explained
Entrepreneurs seeking finance frequently turn to venture capital (VC) funding, but there are a number of other options available. Here are 10 different forms of funding options for entrepreneurs, from getting the ideal grant to crowdsourcing from your largest fans.
VC funding
A venture capital firm provides cash in exchange for stock while providing VC investment. The reason VC is often the most popular kind of investment is that the checks are typically bigger than other choices, which is especially helpful for firms trying to develop at breakneck speeds.
Accelerators
Accelerators choose a group of early-stage Entrepreneurs to participate in a mentored development programme, which is helpful for first-time founders without a network. As they “Graduate,” participants can also get a cash infusion, but they typically must forfeit some stock, often no more than 10%.
But, not all accelerators are created equal. According to VCs, just a few programmes, like Entrepreneur First and Y Combinator, are worthwhile for Founders’ time and investor attention. However, while having a mentor is beneficial, it is not always a positive relationship: 71% of those who told Sifted that their accelerator wasn’t helpful indicated that the reason was that their mentors didn’t have the necessary expertise to assist them.
Angel Investors
While some angel investors have worked at VC companies, others transition from being their own entrepreneurs or operators. They put money into the business in exchange for stock, either as Individual Investors or as a member of a syndicate that has collected funds from multiple angel investors. In addition, they may be experts in a certain field and will make investments with that goal in mind; as a result, they could be able to provide advice that is more sector-specific than more generalist VC companies. Also, having several angels on your cap table has grown more typical.
Friends and family
Several firms will first turn to their closest friends and family for funding before seeking other sources, especially in the early stages. One benefit of this form of fundraising is that you don’t need to persuade a jury of investors that you’re worthy of their time and money because you know the individuals you’re presenting to.
There is helpful advice on the advantages and disadvantages of this kind of funding from the Association of Chartered Certified Accountants.
Yet, being in a position to acquire capital from friends and family is advantageous because many founders do not have the luxury of affluent colleagues.
Bootstrapping
A company that is self-funded by the members of the founding team, followed by income from the enterprise, is said to be bootstrapping.
There are a few things to think about initially, but it could be the best match for a business in its early stages. Bootstrapping may not be beneficial for businesses in capital-intensive industries, those still figuring out product-market fit, or those operating in a “winner takes all” market, and they may find VC investment to be more suitable.
Crowdfunding
Crowdfunding is a kind of financing in which a large number of individuals contribute small sums via a platform.
Types of crowdfunding include:
Equity crowdfunding: Supporters take on joint ownership of the business. Businesses frequently raise the majority of the capital they require from a lead investor first, before going to the public, because they can’t normally rely entirely on this type of financing.
Rewards-based crowdfunding: Non-financial exclusive benefits are provided to supporters, such as early access to the product (useful for gathering customer feedback).
Crowdlending: Startups can apply for interest-added loans on peer-to-peer lending platforms. This money must be repaid by a specific date and may be secured by assets, thus companies who are unsure about their capacity to repay on time run the risk of defaulting on the loan.
Grants
Some organisations provide grants, a type of non-dilutive funding where you are not required to give up equity in exchange for the funds. This is a typical choice for firms in the biotech, healthtech, and other scientific fields, but it also applies to others with an impact goal. According to Scott White, CEO of UK semiconductor firm Pragmatic, which has received both European Innovation Council and UK Research and Innovation funds, these industries are attractive candidates for grant financing since they may be a “very beneficial method to expedite essential R&D activities.”
Bank Loans
Most major banks provide business loans to entrepreneurs, but these loans can be challenging to obtain for extremely early-stage businesses since they frequently lack a solid business strategy and are therefore viewed as greater risk. Before it failed, Silicon Valley Bank, for instance, was a well-liked option for entrepreneurs since it offered loans with less restrictions than many traditional banks.
Venture debt
Rather than being swapped for stock, venture debt is a kind of capital that must be repaid.
Later-stage firms that have already obtained capital from VCs or institutional investors typically have easier access to debt. It also benefits start-ups that choose profitability above expansion at all costs because the likelihood that the money would be returned sooner is increased.
Convertible loans
A kind of financing called convertible loan notes lies between borrowing and equity. If a startup loan is not repaid by the specified maturity date, it turns into equity. Because no equity is lost if the money is repaid on time, this option is great for entrepreneurs who need some quick funding but don’t want to give up any more stock and believe their firm will soon be generating income.
Revenue-based Financing
Technically, revenue-based finance is a loan that must be repaid by offering the lender a portion of future gross income over a predetermined period of time. Unlike bank loans, applicants won’t need to pledge any assets as security. Moreover, revenue-based financiers are frequently viewed as a medium ground between disinterested bank lenders and intensely active private investors when it comes to amount of engagement.
As the monthly payments are a predetermined percentage and the nature of this sort of funding makes it only a viable choice for startups with steady revenue, companies that are strapped for cash or depend entirely on their income may not be able to afford the repayments.
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