The 4 Best Ways for Funding Startups

Tuesday, October 31, 2017, 6:00 PM | Leave Comment

In order to launch a successful startup, you need vision, a carefully chosen team and a great deal of energy.

However, this is not enough – the hunt for the funds is an equally important and difficult part of it. It’s quite distressing to know that, for example, 40 percent of startup companies in the U.S. can’t stretch the budget enough to make it through the first three years of business.

Therefore, it is crucial to pick the right financing model for your business right from the beginning.

Here are a few suggestions.

The 4 Best Ways for Funding Startups

  1. Venture capital

    Venture capital firms look for companies who have a potential to develop quickly but need a bit of a financial boost, and in turn, they expect an ownership stake in these companies.

    Therefore, the advantage of this funding model is that you’re not expected to give the money back, but on the other hand, you’re expected to make the venture capital firm a shareholder.

    People who run and manage these funds and firms usually enjoy a good reputation in business and have a lot of experience in entrepreneurship, and they will offer you their mentorship and contacts, which can be of huge help.

    However, it comes with a price – you will have to sacrifice equity and full control over your firm, since venture capital firms do this exactly in order to take part in the company’s crucial decisions and, of course, to take a fair share of the anticipated large profit.

  2. Angel investors

    Similar to venture capital firms, angel investors will help you fund your business in exchange for becoming a shareholder and getting involved in running the company.

    Unlike venture capital firms which raise funds from a number of companies and then redistribute the money to small businesses, angel investors are usually individuals (although often connected in networks) who use their own money to finance promising startups.

    The pros and cons of using angel investor’s money are similar to those of using venture capital – you don’t have to give the money back, they offer some valuable advice and contacts, but you have to give them a share in the ownership and control of your business.

    However, the advantage of angel investors over venture capital firms is that, since they are investing their own money, they might be more flexible and open for negotiations when making a deal.

    On the other hand, they are less stable in terms of follow-on investments, which they rarely make, while in the case of venture capitalists, 2/3 of their total funds are used for follow-on investing.

    Angel investors are usually eager to help you with seed funding but tend to pull back quickly if they realize your business is not reaching the expected milestones in time.

  3. Small loans

    The advantage of taking small loans is that you get to keep your independence and your whole earnings for yourself and you don’t have to think about further division of shares and profit.

    Of course, it also comes with a price, since you will have to give that money back with a few percent of interest, but you will keep your freedom and the loan could give you the boost you need to continue to run your business by yourself. There will be times when you need to act quickly and grab the opportunity you might not have again.

    For example, whenever you realize that an immediate small investment can ensure a quick and guaranteed turnover but you can’t pull it off by yourself, consider taking some fast loans to help your business reach new heights.

  4. Crowdfunding

    A big advantage of crowdfunding is the fact that you can reach a portion of your audience immediately, before even starting the business.

    It also leaves the room for other forms of funding and could even help you get funds from venture capitalists or angel investors, since pulling the crowdfunding off successfully automatically means that there’s a significant amount of people that like your idea and your product and that it has a good potential of becoming profitable.

    The downside is that very few businesses which attempt to finance themselves through crowdfunding actually succeed in it and you will have to have an idea that is interesting, comprehensible and appealing to a very wide audience to even hope for a good outcome.

Among other ways to finance your startup are factoring, family loans, self-funding, credit cards, or even trying to negotiate an advance from your partners or big customers.

It’s true that, at the end of the day, without big ideas to drive you forward and the right team to make it happen, your startup isn’t worth much, but it’s still essential to pick the right way of funding because it might just determine if your business endeavor will end as a success or as a failure.

Author BIO

Nate Vickery is a business consultant and blogger. He is mostly engaged in company management and finding best technology solutions for specific SME needs.

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