Explain the various ways to fund startups.
Answers
1. Friends and Family
Borrowing money from friends and family is a classic way to start a business. While it may be harder to convince investors or banks of the quality of your idea, your family and friends often believe in your dream.
They may be more willing to help fund your company. If you do go to friends and family for loans, it’s a good idea to make sure that each of you gets sound legal advice, especially if you are taking the money as a loan.
The downside? Borrowing money is a quick way to lose friends and sour family relationships. Be careful if you decide to proceed this way.
2. Small Business Loans
Some banks specifically offer loans to small businesses, but banks historically are careful about giving money to small companies. It can be difficult to qualify. There are alternative lending companies, however, who may be better equipped to help you get your business off the ground.
The downside? Some of those alternative lending companies are predatory. Make sure you know who you’re borrowing from before you sign on the dotted line.
3. Trade Equity or Services
Looking to get some web design done? See if you can barter with your neighbor who does some freelancing on the side. Perhaps you’ll help him with some marketing advice down the road. In virtually every city, there are communities of fledgling business owners who can work together.
The downside? Trading services or equity can be an awful way to make a living, and so not everyone is willing to do it. Don’t be offended if your Number One choice says no way.
4. Bootstrapping
One of the most common ways to get a business up and running is through “bootstrapping.” Basically, you use your own funds to run your business. This money may come from personal savings, low or no interest credit cards, or mortgages and lines of credit on your home. Getting a free credit report card will help you assess where you financially stand. Knowing this will help you figure out the interest rate you will get on loans, which can give you access to affordable credit.
The downside? If your business doesn’t succeed, you may have a substantial amount of debt that you now need to manage.
5. Incubator or Accelerator
Business accelerators and incubators have sprung up all across the country, particularly near colleges with a strong business program. These spaces are part communal workspace and part mentorship development centers. Young businesses can get a great start here while partnering with some amazing people.
The downside? They are often focused on tech-heavy businesses, so you might struggle to find one that works for your company.
Explanation:
Venture capitalists, angel investors, strategic partners, and crowdfunding platforms are also great options to consider. It's important that you always start with a strong business plan. Come up with realistic financial projections. This will make it easier for you to get money from investors.
Bootstrapping your startup business:
Self-funding, also known as bootstrapping, is an effective way of startup financing, specially when you are just starting your business. First-time entrepreneurs often have trouble getting funding without first showing some traction and a plan for potential success. You can invest from your own savings or can get your family and friends to contribute. This will be easy to raise due to less formalities/compliances, plus less costs of raising. In most situations, family and friends are flexible with the interest rate.
Self-funding or bootstrapping should be considered as a first funding option because of its advantages. When you have your own money, you are tied to business. On a later stage, investors consider this as a good point. But this is suitable only if the initial requirement is small. Some businesses need money right from the day-1 and for such businesses, bootstrapping may not be a good option.
Bootstrapping is also about stretching resources – both financial and otherwise – as far as they can. Check out these 30 tips to save money and improve your business cashflow.
Crowdfunding As A Funding Option:
Crowdfunding is one of the newer ways of funding a startup that has been gaining lot of popularity lately. It’s like taking a loan, pre-order, contribution or investments from more than one person at the same time.
This is how crowdfunding works – An entrepreneur will put up a detailed description of his business on a crowdfunding platform. He will mention the goals of his business, plans for making a profit, how much funding he needs and for what reasons, etc. and then consumers can read about the business and give money if they like the idea. Those giving money will make online pledges with the promise of pre-buying the product or giving a donation. Anyone can contribute money toward helping a business that they really believe in.
Why you should consider Crowdfunding as a funding option for your business:
The best thing about crowd funding is that it can also generate interest and hence helps in marketing the product alongside financing. It is also a boon if you are not sue if there will be any demand for the product you are working on. This process can cut out professional investors and brokers by putting funding in the hands of common people. It also might attract venture-capital investment down the line if a company has a particularly successful campaign.
Also keep in mind that crowdfunding is a competitive place to earn funding, so unless your business is absolutely rock solid and can gain the attention of the average consumers through just a description and some images online, you may not find crowdfunding to work for you in the end.
Some of the popular crowdfunding sites in India are Indiegogo, Wishberry, Ketto, Fundlined and Catapooolt.
In US, Kickstarter, RocketHub, Dreamfunded, Onevest and GoFundMe are popular crowdfunding platforms.
Get Angel Investment In Your Startup:
Angel investors are individuals with surplus cash and a keen interest to invest in upcoming startups. They also work in groups of networks to collectively screen the proposals before investing. They can also offer mentoring or advice alongside capital.
Angel investors have helped to start up many prominent companies, including Google, Yahoo and Alibaba. This alternative form of investing generally occurs in a company’s early stages of growth, with investors expecting a upto 30% equity. They prefer to take more risks in investment for higher returns.
Angel Investment as a funding option has its shortcomings too. Angel investors invest lesser amounts than venture capitalists (covered in next point).
Here is a list of popular Angel Investors in India – Indian Angel Network, Mumbai Angels, Hyderabad Angels.
Also check out the list of individual Angel Investors in India, some of these active angel investors have invested in many successful startups.