How to raise money for your startup
Raising capital for business expansion is one of the main problems entrepreneurs face. Every startup will require financial assistance unless its owners are independently affluent. Unfortunately, most startups and small enterprises don’t have an endless supply of funds to keep them operational. The solution is to obtain funding for your company from outside sources.
A fantastic idea only goes so far. The lengthy, arduous road from a business concept to a profitable entity requires capital. Fortunately, there are several ways entrepreneurs can raise money for their businesses. There are generally two fund-sourcing options to consider, which are: dilutive and non-dilutive funding.
That said, to learn more about these funding options, here are some pieces of information to let you understand further.
Non-dilutive funding
If you’re a startup, you should understand what is non-dilutive funding as it may be preferable to dilutive funding. Non-dilutive funding offers founders an alternative to giving up stock in their company. Business owners with a strong team, a unique product or service, and a clear plan for business expansion may not have to give up control until they’re ready. That said, here’s a list of some of the most common non-dilutive funding options.
1. Crowdfunding
Crowdfunding is one of the most popular methods of startup fundraising. Think of crowdfunding as accepting a loan, donation, or investment from several people.
There are several crowdfunding websites businesses can choose from. The business owner needs to provide a detailed description of his business on the crowdfunding website. Then, the owner must outline the objectives of the company, strategies for turning a profit, the amount of capital he requires, and why. This is so that prospective sponsors can learn about the venture and donate funds if they like the concept.
If your business runs an effective campaign, it can eventually draw venture capital investment. But bear in mind that crowdfunding is a cutthroat market for raising money. So, unless your company is well-established and can attract customers with only a brief description and a few images posted online, you might not succeed.
2. Grants
Grants are another excellent non-dilutive financing option. Grants do not elicit interest or compensation. They are often given out by governmental organizations that want to promote successful enterprises at various stages. Grants provide firms with a strong foundation, after which the owners may sell shares to investors to spur development.
3. Loans
When looking for capital, entrepreneurs may turn to banks. Banks offer working capital loans or funding. Working capital loans are those needed to fund an entire cycle of revenue-generating activities. With bank funding, business owners must go through the standard application procedure of providing the project report, business strategy, valuation information, etc.
4. Microfinance
As mentioned, most entrepreneurs seek funding through a bank loan. However, not everyone can get a loan from the bank for various reasons. Poor credit ratings are typically the primary reason for failed loan applications. Nonetheless, options are still available even if you can’t secure a bank loan. Microfinance is the provision of financial services to individuals with lower demands and unfavorable credit ratings.
5. Contests
The opportunity of raising funds has been significantly increased because of contests. It inspires business-minded individuals to launch their ventures. You must develop a product or company strategy to compete in these events. In addition, you may earn media recognition if you win these competitions.
Your project must stand out to boost your chances of winning these competitions. You have two options for pitching your idea, in person or through a business plan. It should contain enough information to convince anyone that your idea is valuable.
Dilutive funding
Dilutive finance, commonly referred to as equity financing, is financing that necessitates the transfer of a share of your business. It goes without saying that when you give up a share of your firm, you also give up some control and potential income. However, it might not be the ideal source of funding for a company still in its early phases of development.
1. Angel investors
Individuals with money to spare and who wish to participate in new business ventures are known as angel investors. Angel investors collectively examine the proposals before investing. Additionally, they could offer guidance or mentorship.
Many well-known businesses were launched with the assistance of angel investors. This unique investment funding often occurs when a company is in its infancy, and investors usually receive substantial shares in the business venture.
2. Venture capital (VC)
If you’re a startup, this is where you place your largest wagers here. Professionally managed funds make venture capital investments in businesses with significant potential. Typically, they invest in a company’s equity and may exit once it goes public. Additionally, venture capital firms provide entrepreneurs with knowledge and support.
Enterprises past the startup stage and making money already may benefit from a venture capital investment. But keep in mind that VCs expect a return on their investment. They frequently aim to recoup their investment within three to five years. So, they might lose interest in you if your product takes a long time to reach the market. Additionally, this might not be your ideal course of action if you don’t want to make too many compromises or if you desire to express creative freedom in your business operations.
3. Business incubators and accelerators
Early-stage enterprises might look at these programs as funding sources. Note that some incubators and accelerator programs are for-profit, while some aren’t. Therefore, these programs can also be a source of non-dilutive funding. So, if you’re uninterested in giving up equity for funding, make sure you choose a not-for-profit program.
Despite the similarity of the two names, there are only a few significant differences between them. Incubators are like a parent to a child, supporting the company by providing money and training. Accelerators do the same thing as incubators, except an accelerator encourages the startup to speed up its growth process.
An incubator keeps you in close contact with venture capitalists interested in investing in your business ideas. Investors may be impressed and view your acceptance into a reputable program as evidence of your abilities and motivation. If you apply and get accepted into these programs, you can meet with potential investors and other companies in the same industry. However, a time investment from business owners is required for these initiatives.
Conclusion
The capital shortage is one of the significant problems startups faces. Therefore, you probably need outside funding sources to grow quickly. While the abundance of loan choices may make starting a business easier, smart business owners should consider how much financial support they require. Then choose the best funding options available. Thankfully, many funding options currently exist, all of which have pros and cons. So, explore all your options, and choose the one that best meets your needs.
