Struggling to secure funding for your startup? Here are some of the most common ways to do it.
It takes a lot of work to turn an idea into a product, but it takes even more work to turn that product into a startup. For many of the new businesses that started during 2020 to 2022, this process got even more complicated. COVID-19 introduced a slew of new factors that influenced business, most of which popped up completely by surprise.
One of the hardest parts of creating and sustaining a startup is funding it. It can be extremely tricky trying to find someone who’s willing to give you the money you need and doesn’t want to change your business into something it’s not. Fortunately, there are a few different ways to go about getting the money you need. Below are four of the most common ones:
With all the chatter about venture capital, bootstrapping, and other forms of funding, it can be easy to forget about the most straightforward solution: banks.
Banks are a great option for startups because they offer a wide variety of products and services that can help your business get off the ground. You can get a loan to purchase equipment, fund marketing efforts, or cover any other costs you may have. And since banks have been around for so long, they know how to work with startups and can offer you guidance and advice on how to grow your business.
The downside of going the bank route is that it can be difficult to get a loan if your business is in its early stages. Since around 80%-90% of startups eventually fail, banks are taking on a big risk by giving loans, at least statistically.
In order to secure a bank loan, you’ll generally need to have a good credit score, at least two months of cash reserves to make your payments, and strong collateral—usually in the form of a significant asset, like your house.
Trading equity is one of the most common ways that startups get funding. It usually takes the form of getting funding from venture capital firms or angel investors.
What’s an Angel Investor?
Angel investors are individuals or groups who invest their own money into a startup in exchange for a piece of the company. These are usually affluent individuals who have faith in a company’s future success.
What About Venture Capital?
Rather than directly investing their own money, VC investors invest the money of their limited partners (LPs), which are usually other large companies or wealthy individuals.
In either case, these investors offer you funding in exchange for equity in your company. They become major stakeholders and hold influence over major business decisions, which can cause problems if your visions about the company’s future don’t align.
Non-dilutive funding is a term used to describe any type of funding that doesn’t dilute your ownership in the company. This can come from many different sources, but for startups, it usually comes from firms who specialize in non-dilutive capital, like Novel Capital or Lighter Capital.
Non dilutive capital can be a great way to secure the funding you need without sacrificing your influence over your company. The usual method utilizes revenue-based financing, which involves repaying an investor with a predetermined portion of the startup’s revenue every month until the loan is repaid—without any interest.
Non-dilutive funding is an excellent option for startups that don’t have the connections or resources to secure other types of funding. This is also a viable choice for those who are already at a revenue-generating phase, but need more capital to support development goals. Requirements are often lenient, with startups only having to prove past success in making reliable and consistent revenue each month.
Crowdfunding has become very popular in recent years, and for good reason. It’s essentially free money, or at the very least, it’s money that you get to repay on your own terms. Crowdfunding involves soliciting donations from a large group of people, usually through a website or platform like Kickstarter or Indiegogo.
Theoretically, you could offer nothing in return for your backers’ money, but it’s standard practice to offer a reward in exchange for donations. This can range from early access to the product or service to exclusive merchandise or experiences.
Crowdfunding is a great option for startups because it doesn’t require you to give up any ownership in your company, and it’s a relatively easy way to get funding. However, it can be difficult to attract a large number of backers, so you’ll need to have an effective marketing strategy in place. It’s also fairly unpredictable, as you never know which crowdfunding campaigns will inspire people to take action and which won’t.
Although not an exhaustive list, these are the four most common ways startups receive funding. While each has its own advantages and disadvantages, they all have the potential to help your business grow. It’s important to do your research and find the option that best suits your company’s needs.