Accessing capital and getting funding is a continual challenge for entrepreneurs. Knowing what forms of funding are out there and deciding which avenue is best suited for your startup can be a daunting task in itself.
Let's explore the 8 main types of startup funding scenarios.
Investing in your own startup is the most common way for entrepreneurs to get started with capital and it may seem like a no-brainer to most entrepreneurs.
After all, investing in yourself and your business is a sure fire way of proving to investors and bankers that you are invested in the long-term vision of your company.
Another term for personal investment is "bootstrapping" it conveys the idea that you are "pulling yourself up by your bootstraps" and operating the business on a shoestring budget supported by personal finances or revenue generated from sales only.
A common source of funding for a startup founder is the group of people closest to you, your family and friends.
They know who you are and already believe in you; therefore, they are more likely to invest in your business in the early days.
Friends and family are also less likely to want a stake in your company but will usually want their investment repaid
Venture Capital or VC funding as it is often referred to, is where an investor will exchange money in the way of capital investment for a share or stake in your company.
This typically means giving up some ownership of your company to an external party.
VCs typically tend to want a high return on their investment, as they see it they are taking on a high degree of risk by investing large sums of money into an early stage company.
In the startup world this is often referred to as 10x their investment where they hope to achieve ten times their investment in return at some point.
It is worth noting VCs typically invest in technology-driven businesses or companies in high-growth potential in sectors such as information technology, communications and biotechnology.
Angels or Angel investors are generally wealthy individuals who will invest their own money into businesses owned by others.
They are usually retired company executives and leaders in their own fields, so they may contribute their knowledge and experience, contacts and network in addition to providing a capital investment.
In exchange for risking their money, they reserve the right to supervise the company's management practices. In concrete terms, this often involves a seat on the board of directors and an assurance of transparency.
Business incubators (or "accelerators") provide an ecosystem of support for new businesses in various stages of development.
Incubators might be in specialised areas, such as technology, local economic development areas, agriculture or education.
Incubators typically provide additional support around mentorship, education, training, logistical support and a rich network of potential investors and partners. Incubators could run programs for startups that involve anywhere from a six month to two year "incubation" program.
Government agencies provide grant funding which may be available to your business.
Getting access to grants can sometimes be a little tough as there are a number of criteria in place and usually a bit of competition from your fellow entrepreneurs.
Usually for grant funding you need a clear business plan, project plan for how you will implement the funding and of course a budget to provide a thorough roadmap of how you are going to use government funds.
Detailed research is usually a critical part of accessing grant funding and realistic budget and project projections are essential.
Applying for a bank loan and gaining funding through borrowing money is another common type of business investment.
This is often the case for small and medium sized businesses that may not attract funding from VCs, angels or incubators. In general banks invest or loan to businesses that have a good track record.
Having a sound business plan is paramount to receiving funding from bank loans.
Sweat equity is a type of investment where startup founders and business owners exchange time/ skills for equity in the business. A founder might need to fill a specific skill gap and bring in someone to fill the gap and provide skills and expertise in exchange for equity into their business.
Therefore, rather than paying that person a salary, which usually the business can not afford, the two parties come to an agreement on how much equity that person's time is worth to the company.
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