Owning a businesses is part of the American dream. Someone comes up with a wonderful idea, produces and markets it, and becomes rich beyond their wildest expectations. While some businesses, such as Apple, are excellent examples of this dream, for most people the reality is less glamorous. However, startups can still be quite successful.
How to Find Funding for Your Startup
For any startup venture, finding funding is a major concern. No matter how great the idea or product, traditional banks are not going to fund it on the mere hope of future returns, especially since more than 50 percent of small businesses fail in the first four years. Of those businesses that do fail, 82 percent do so because of cash flow problems. That’s why entrepreneurs have to seek reliable sources of investment money elsewhere.
Venture capital is simply financing from investors looking for companies that can provide a good, long-term return on their investment. This type of financing can come from individuals, investment banks, and other sources. The risks are high for these investors, but they can also reap excellent financial benefits. In return for this funding, the investors usually receive equity in the company, which means they have some decision-making power in the business.
Finding venture capital for startups is a popular but competitive choice. Also, many venture capital sources prefer to invest in tech companies, so those startups not in that realm may need to seek funds elsewhere.
Finding an angel investor is another way to fund your startup. They are generally individual investors looking for profits of 25% or more on their money. In return for providing financing, they usually receive a equity position in the company.
An angel investor provides startups with the cash they need without forcing them to incur debt. If the company fails, the angel investor does not have to be paid back. However, the business owner does lose some control of the company, something that does not happen with traditional debt financing.
Business incubators are organizations that work to help startups and new businesses launch and become productive. The incubator members offer connections to various types of funding and also offer business guidance. They involve themselves with the business plan and work to help the companies grow. Collaborating with an incubator offers some solid benefits, but entrepreneurs may lose a bit of control over the company vision if they go with this source of funding too early in the process.
Crowdfunding is still a viable option for some startups. Kickstarter, Indiegogo and others have helped launch some extremely successful companies, including Elevation Lab and Bragi. These companies raised millions with their crowdfunding campaigns, while backers receive no financial return. Instead, those that contribute to crowdfunding usually get special updates or other incentives that make them feel a part of the creative process. The crowdfunding platform receives a small percentage of the funds.
The competition for crowdfunding is now intense, so a startup has to work hard to capture the imagination of potential backers. It the idea isn’t sexy, backers will overlook it.
The Small Business Administration and some other organizations offer small business grants to certain groups or project types. Startups by minorities and women are eligible for some of these funds, which generally do not need to be paid back. Certain types of projects, such as broadband for rural communities, may also be able to secure these funds.
Getting these funds is a long and competitive process, so entrepreneurs must measure the time it takes against the potential benefits of the grants.
Getting startup money from family members and friends has its advantages. These people are already disposed to believe in the business owner and want them to succeed. The terms of these loans are often quite favorable, with only modest returns expected on their investment.
To protect everyone, these loans need to be official, with each party concerned receiving proper legal counseling before signing the papers. Even so, taking money from friends and family can cause hard feelings, particularly if the business fails.
Many people finance at least part of their startup needs by “bootstrapping,” which involves using their own money. They may use their savings, their retirement funds, a second mortgage, etc. to get their new business off the ground. In fact, some people put all of their financial resources toward financing their dream.
Of course, self-financing can be quite dangerous since so many startups fail. The business person can end up with no company and massive personal debt.
While some startups take off, making their founders and investors a significant amount of many, many fail in the first few years. This risk makes acquiring startup financing challenging, but finding investors can be done, particularly for exciting and innovative ideas. While those in the tech field have an advantage in the venture capital area, others can secure financing in alternative ways, including through grants, angel investors, incubators, etc.
Whenever possible, startups should look for outside funding. Finding this funding can be a long and frustrating process, but it greatly lowers the risk to the startup founders.