Now a days there is growing startup trend, and one of main concern for all these startup is to where they can get funds for their business idea!
Every entrepreneur goes through this phase where they a have discussed about their startup idea and have worked a great business plan on paper but when it comes to implementing the business plan a startup as per me requires 3 things : “Funds, Passionate Employees and a Mentor”.
Now funds are vital to start off and is the most difficult part if you don’t know where to look for exactly. For Investors to invest, they need a sales forecast in order to determine business valuation, plus it is always a question of what you qualify for, and what are your future plans and prospects to get an investor write a checks for you.
I have done market research to find the most probable ways to get funds for your startup. Here is my list of the 5 most common sources of funding today :
1. Seed Funding
(Your own money or a help from friend or family member)
This is the most common these days, as the costs to start a business are at an all-time low, and over 90 percent of startups are self funded (also called bootstrapped). One of the reasons there is a lot of uncertainty over a startup. Unless its been put to test into real market, obviously no one would want to invest in a idea except you.
The another source is friends and family simply because you don’t need numbers or sales forecast to get their interest unlike professional investors. Also you can except a genuine response for your idea which is very “helpful” to start off with.
Its the best way to startup as there is a freedom and less pressure to perform but there are also pros and cons for seed funding as well.
- You can invest as much as you need
- You don’t have to give up on equity of your business.
- You have a friend or family member whom you can trust just in case you need to more funding, you can easily request for it.
- Less pressure, as you have support from your friend or a family member
- You’ll potentially risking someone’s savings it can be a friend, a family member or your money itself.
2. Look for Startup Incubators
Now you might not get real money in terms of investment but startup incubators help entrepreneurs solve some of the problems commonly associated with running a startup by providing workspace, seed funding, mentoring, and training.
The sole purpose of a startup incubator is to help entrepreneurs grow their business. Types of service incubators can provide are :
- Help with business basics
- Marketing assistance
- Accounting/financial management assistance
- Connections to strategic partners and many more..
This can easily help entrepreneurs to focus on their business rather than worrying about anything else which are taken care off by incubators. The services differs in terms of what stage your business is in, if your business has grown as a startup then these incubators can help provides contacts and leads for partners or venture capitalists.
- Expert advice and guidance
- Opportunities to enhance your business
- You might not get what your looking for exactly as each incubator provide different sets of services and help
3. Venture Capital Funding
Venture capital funds come from venture capital firms, which comprise professional investors who understand the intricacies of financing and building newly formed companies.
In exchange for their funding, venture capitalists expect a high return on their investment as well as shares of the company. This means the relationship between the two parties can be lengthy. Instead of working to pay back the loan immediately, the venture capitalists work with the company five to 10 years before any money is repaid.
- Expert advice and guidance in terms of marketing, productions
- Investor’s relations with other partners can help open doors to new opportunities
- Business partnership to grow business together.
- Investors take some percentage of companies equity
- Sometimes giving up higher percentage of equity can lead to low control over company.
4. Bank loans
Bank’s provide small business loan for startup companies, In order for a startup to get bank loan it should meet bank requirements in terms of project returns, business model, ability to payback loan and management experience.
- Lower rates of interest-Though tough to get, banks provide loans at lower rates of interest than other lending agencies and instruments like credit cards.
- Bank loans offer tax benefits– Startups taking loans from banks enjoy some relief from tax, since the percentage of profits used to repay the loan is exempted from tax.
- Lengthy application process– banks need to verify all the credentials and details about the business before sanctioning a loan. Therefore its application process is very long and its review etc. takes a long time.
- Long list of prerequisites to qualify for the loan– banks have long list of conditions that a business should fulfill before they clear the loan. It is sometimes not possible to meet all of them.
- Risk of losing Collateral– bank loans are generally sanctioned against some collateral, often the entrepreneur’s house and property. This stands the risk of being lost to the bank should the business fail to take off.
5. Angel Investor Funding
Angel investors are most often individuals entrepreneurs who want to help other entrepreneurs get their businesses off the ground – and earn a high return on their investment. In order to attract investment one has to approach local angel group or can register their business on existing Angel investment portals such as Angel List
- Angels normally have
experience in the industry and can offer helpful guidance and introductions to their network.
- Because angels are less
rigid than VC Firms, flexible business agreements are common.
- You can be forced to
give up some degree of control over your company. Due to the high-risk nature of angel investing, angels rarely make follow-on investments.
All of these options require work and commitment on your part, so there is no magic or free money. Every funding decision is a complex tradeoff between near-term and longer-term costs and paybacks, as well as overall ownership and control.
With the many options available, there is no excuse for not living your dream, rather than dreaming about living.
This sums up my first article in business and investment sector. Hope to write more. Thanks for reading!