Business funding for your startup is one of the vital steps when it comes to starting your own business. According to a study 90% of new businesses fail during the first year due to lack of funding. One might not want to admit but capital is the bloodline of any business. It is why at at the inception of every business/startup the question is proposed – How do I attain startup funding?
The requirement of funding usually comes up after you realize that your idea is viable. After having determined the nature and type of business, the time you need funding depends upon you.
Here is a comprehensive guide for you that lists all the various kinds of sources for attaining startup capital.
Also Read: Startup Funding Explained
A good support system is the true foundation for success and these people are none other than your friends and family. Borrowing money from the people around you i.e. your friends and family is a classic way to kickstart your startup. It is much more harder to convince banks and investors of the vision you have for your business, it is relatively easier with your friends and family since they already believe in you.
They are more than willing to provide you with the funding required. However, if you do decide to go down this route, it is best if each party involved seeks legal counsel, if it’s a loan. This will ensure that rights of everyone involved are protected.
The only downside of this is that borrowing money from a friend is the quickest way to lose friendships and put a strain on family relationships. You need to be careful when going down this route.
Trade equity is commonly bartering your services or skills for something that you need. A prime example is that you agree upon a free office space in exchange for supporting the computer systems of the tenants of that office. Or do you need a website for your business? you can ask a neighbor or someone you know that freelances, in exchange for your services. Another example is exchanging trade equity for legal and accounting advice.
In almost all cities there are communities of up and coming business owners who might be willing to work together. The downside to trading equity and services is that it can be a difficult way to keep your business up and running, and most people aren’t willing to go through with it. Try not to take offense if your number one choice says no.
Bootstrapping also known as self-funding is one of the most effective ways to attain startup funding. This is very helpful if you are just starting your business. It is difficult for first-time entrepreneurs to procure funding without showing some semblance of success that their startup might have. Investing from your own savings is much easier and raises less formalities and future compliances.
In most cases bootstrapping/self-funding is prioritized as the first funding option owing to the advantages it brings to the table. Investors tend to view self-investment as a power move and almost 90% of startups are self-funded. However, this will only work if the initial investment required is small. Considering that most businesses/startups need money from day 1 of their get-go hence, it might not be such a good option.
Bootstrapping in simple words is spreading your resources thin; financially and otherwise, as much as you can.
Individuals with excess cash and an acute interest in up and coming startups are angel investors. they also tend to work in groups or networks so as to accumulatively screen and consider proposals before investing in one. Moreover, Angel Investors also tend to mentor and nurture startups along with providing them capital.
Google, Yahoo, and Alibaba are some of the top companies that stemmed from the support of Angel Investors. This type of investing generally occurs in a company’s early stages, where investors tend to demand an equity of up to 30%. Angel investors tend to take more risks whilst investing for higher returns.
The downside to angel investment is that they tend to invest lesser amount of capital in startups than venture capitalists.
Venture Capitals are professionally managed funds who invest in companies with budding potential. VC’s tend to invest in a startup against equity and then exit when an IPO or an acquisition has been achieved. VC’s typically provide expertise, mentorship and act as a buffer for the company’s end goal. They also evaluate the business from a sustainability and scalability perspective.
Venture Capital Investment is usually appropriate for small businesses that have grown beyond the initial stages. These startups are already generating revenues. Companies with fast-growth like Uber and Flipkart that have already allocated an exit strategy whilst gaining tens of millions of dollars. This capital can come in utilization for the company to grow its network.
Much like everything else Venture Capitalists also have downsides as a funding option. VC’s usually look to recover their investments within a three to five year time period. They have an extremely shar approach to company loyalty and if your product/company takes longer than their allocated time, they might walk away.
Venture Capitalists tend to seek opportunities that are beyond the early development stages and have configured a strong team. Moreover, you need to be extremely flexible with your business and compromise with giving up some of its control. Hence, if excessive mentorship and compromise are not your thing than this might not be a good idea.
Also Read: Venture Capitalist Culture in Pakistan
Businesses that are at their very inception can also consider incubators and accelerators as a viable funding option. Almost all major cities have programs that assist near to a hundred startups each year.
Often considered the same thing, there are a few distinguishing differences between an accelerator and an incubator. Incubators are like a parent to to a child, who nurture the business providing shelter tools and training and network to a business. Accelerators so more or less the same thing, but an incubator helps/assists/nurtures a business to walk, while accelerator helps to run/take a giant leap.
Programs such as these usually run their course for 4-8 months and they require a certain level of commitment. However, incubators and accelerators enable a business owner to forge connections with mentors, investors and other fellow startups.
In the United States, companies like Airbnb started off with an accelerator. In Pakistan, you have the National Incubator Center.
You Might be Interested in: The Startup Ecosystem in Pakistan
Crowdfunding is the new “It” way of procuring funding for your business. It has lately gained a lot of traction and has been proving extremely popular.
Crowdfunding works via an entrepreneur putting up his or her business plans on a crowdfunding website. Moreover, they also share their goals, aspirations and long term plans for their idea which in turn enables people to invest or donate to them.
One of the best things about crowdfunding is that it also generates interest in your idea and helps market it accordingly. This is also an effective way to figure out if your idea has what it takes to make it in the market or if the market even has the need for it. This process also cuts out professional investors and brokers by letting the funding be in the hands of the people. Not to forget, that crowdfunding also has the ability to attract venture capitalists down the line if a company or a product is able to garner a successful campaign.
The downside of crowdfunding is that it is an extremely competitive place to earn funding for your business. Moreover, your idea is out there for other people to potentially recreate it.
Every entrepreneur that is starting out knows that the easiest way to do is to procure a bank loan and then pay it back with interest. But what happens if you don’t qualify for a bank loan? Microfinance is basically access of financial services to those who would not have access to conventional banking services. It is increasingly becoming popular for those whose requirements are limited and credit ratings not favored by banks. Programs like Small and Medium Enterprises Development Authority (SMEDA) provide microfinancing for small businesses and have a 25% quota for women led startups.
Growing your business can be difficult either way and capital is not the only thing needed. The plethora of options stated above might enable you to get up and running but to make your business a true success is in your hands.