The world of startup and entrepreneurial funding is complex, full of different types of investment opportunities. But what are the options for those looking to start a company? There are many avenues available for entrepreneurs with great ideas, but each has its pros and cons. This blog post will explore some popular ways to fund your business venture.
Let’s take a look at these opportunities.
Self-Funding / Bootstrapping
The simplest and most common way to fund your startup is by bootstrapping. This means that you pay for everything out of pocket without taking on any debt, using credit cards or loans from the bank. The only external capital that comes into play here are investments made through equity (selling part of the company).
One of the most popular ways to raise funds for a startup, crowdfunding is often used by entrepreneurs to get enough capital together. There are many different types of crowdfundings like equity-based financing (crowdfunding), donation-based crowdfunding, and peer lending. Most of these funding opportunities are on dedicated platforms that act as intermediaries between investors, lenders, and entrepreneurs.
Angel investors are prominent money individuals who invest in new, early-stage companies. The majority of angel investments come from personal wealth or financial institutions such as banks and credit unions. Angels typically invest their capital into a business but may also work with other angels to fund an idea they all agree has potential.
Loans / Credit Cards / Debt
Loans and credit cards are an option, but this is a risky route to take. The interest rates for loans and credit cards can be very high, and repayment terms vary significantly between lenders. Debt comes with legal agreements that should never be entered into lightly. Debt is not always a bad option for funding your business venture, but you need to be very careful about the terms of repayment and interest rates before committing yourself.
Barter is a great way for startups to get their feet wet with equity funding. In the barter system, you exchange your product or service for another entrepreneur’s product or service instead of cash. This allows both of you to be more creative about how much each item is worth in trade and cuts costs on taxes since it’s considered a trade rather than an official sale. Bartering is beneficial in the earlier stages of your business when cash flow may not yet support large expenditures on marketing materials, office equipment, etc.
Commitment to A Major Customer
If you are looking for funding to support your sales efforts, this option is ideal. Leverage an existing relationship with a large customer who will commit the business to the new product or service by purchasing in advance of delivery or committing against future purchases.
Government Grants and Loans
The government offers loans, grants, and other incentives to support new business ventures in the community. They will often provide you with a loan at very competitive interest rates with few or no repayments for several years, allowing your cash flow to grow as the company can pay down debt rather than just service it. This can be a great way of starting if you have a good idea but lack funding from traditional sources such as family and friends or angel investors.
Friends and Family Investors
Friends and family investors are typically not professional venture capitalists. They provide financing through personal savings rather than through a business entity formed to act as the investor in the funding round. Investors who put up this kind of money tend to be close friends or relatives (hence “friends and family”). Still, they may also include coworkers or business associates who are willing to invest in an early-stage venture.
Incubators / Accelerators
Incubators and accelerators are great for startups that have just launched because they offer mentorship, networking opportunities, and business connections. Other benefits include office space (usually at a reduced rate), access to equipment like computers and printers, a chance to work with other companies in the accelerator program or incubator facility, as well as legal services such as incorporation help.
Venture capitalists are professional investors who typically direct large amounts of capital towards startup companies. Venture capitalists usually invest in late-stage growth startups that show great promise, but they may also invest in early-stage or emerging businesses. The venture capitalist’s return on investment is subject to the success or failure of the company and its ability to repay its initial investment with interest.
Small Business Grants / Loans
Small business grants are awards provided by the government or some other public body to aid small businesses in their early stages. Grants may be need-based, merit-based (for specific job creation), or awarded first-come, first-served. Some of these types of funding may require that you meet specific criteria such as underrepresented minorities, women, or veterans.
Make sure you understand what is needed before applying, and make sure your proposal clarifies why you should receive this grant over anyone else who uses it. Grants range from $500 -$100k depending on which source they come from and whether they are federal vs state vs city. There are thousands of different kinds, so it’s essential to research the type of grant you are applying for.
Partnership / Licensing
Licensing is a great way to get your product or technology in front of many companies. The licensing agreement allows for the company to pay you up-front fees and ongoing royalties for using your product while at the same time giving them exclusive rights to sell it within their market(s) of interest. You can also pursue grants, although they are much more competitive than loans, and sell out quickly to the highest bidders. Grants usually require matching funds from your company’s side, so you will need to evaluate which ones make sense for your business carefully.
Ask a Lawyer
What are some available funding options for early-stage startups? Angel investors, venture capitalists (VCs), and incubators/accelerators like Y Combinator provide seed money to start new businesses. If you want investment capital from angel or VC sources, be prepared to give away equity in your company; the more an investor invests, the more equity they will receive.