A startup business is a dream that many people have. But to succeed with a startup, just having a great business idea is not enough.
An essential factor in the success of a startup is your ability to secure funding to get the idea off the ground. Funding helps you get started and allows you the opportunity to grow your business.
Many startup entrepreneurs fund their new companies with their capital or by borrowing money from friends and/or family.
But wait. There are other financing options for you to consider. As a beginner entrepreneur, you should understand that raising finances for your startup will not be easy. The funding process can take a lot longer than you think.
Let us explore three important options you can consider to get startup funding for your company.
You might have heard the term ‘angel investor’ bandied about while researching ways to fund your business idea. Well, angel investors are individuals who invest in startups in exchange for equity ownership.
There has been a rapid increase in angel investing in startup companies in recent years. There are several high-profile successful startups such as Uber and Facebook to take a cue from.
If you are wondering how much funding angel investors can offer, we can tell you. Angel investors generally invest $25,000 to $100,000 in each startup company, but this figure can go higher.
What angel investors look for in startups:
- The passion, commitment, quality, and integrity of the founders
- The market opportunity and the growth potential for the company
- A well thought out business plan and early evidence of gaining momentum towards such plans
- An appropriate valuation. Remember, angel investors invest at an early stage, at a time when risk is highest. Therefore, they need companies to have lower valuations.
- Angel investors explore the startup’s viability of obtaining further rounds of startup funding
There are several ways to scout out angel investors.
You can find potential investors through:
- Other entrepreneurs
- Angel investor networks
- Lawyers or accountants
- Venture capitalists or investment bankers
- Crowdfunding platforms such as Kickstarter
The ideal way to secure an angel investor is through an introduction from a colleague or friend of an angel investor.
Angel investors are more likely to invest in your startup if they are familiar with your sector of business. Trawl through any business connections you might have in the industry category of your startup.
Serial entrepreneurs are also trustworthy angel investors. They often have the money to invest but also bring other important benefits to a startup such as:
- Access to a strong network of venture capitalists
- Sound advice
- Credibility through association
- Contacts to potential customers
- Knowledge of the marketplace and strategies of similar businesses
What is crowdfunding, you may be thinking/ Well, crowdfunding means raising funds for startup businesses or any other venture, through multiple funders. Crowdfunding is often done through popular crowdfunding websites.
Crowdfunding helps startup entrepreneurs raise funds for their business and can also help these startups promote and popularize their products and services.
It is quite easy to set up a crowdfunding campaign. All you need to do is set up a profile on a crowdfunding platform, describe your business idea, and mention the amount of money you hope to raise.
Those interested in your business idea will be able to make donations to your campaign. Donations are usually requested with the promise of some form of rewards like one of your products or services.
To make your crowdfunding campaign a success, it is crucial to have an interesting product and brand story. A meaningful reward for donations also goes a long way in sweetening the deal to get donations.
A rewards-based crowdfunding campaign is a popular option for startup companies looking for funding. This allows you to market your products and services through rewards to potential investors or donators.
Many startups have successfully raised substantial funding through crowdfunding campaigns. Are you ready to give crowdfunding a try?
Startup companies looking for financing often approach venture capital (VC) firms. Venture capital firms give startup businesses capital, introduce them to prospective customers and partners as well as other business-related assistance.
However, obtaining venture capital funding is not a cakewalk. Venture capitalists usually prefer to invest in startup businesses that pursue big opportunities with high growth potential.
Venture capitalists also prefer to pump investments into startup businesses that have already shown some traction such as a working product prototype or early customer adoption.
Before funding a startup, venture capitalists use these criteria:
- They invest in specific industry sectors
- They prefer to invest in early-stage seed or Series A rounds or in later-stage rounds for companies that have achieved significant revenue growth
- Venture capitalists invest in specific geographic regions like Silicon Valley, San Francisco, or New York among others
It is important to find out whether a venture capitalist’s focus aligns with your company’s objectives and developmental stage.
How to approach venture capitalists
The ideal way to approach a venture capitalist is by an introduction from one of their trusted professional acquaintances or colleagues – a fellow entrepreneur.
A startup business needs to have a strong elevator pitch and a promising investor pitch to attract the attention of a venture capitalist.
You must also remember, the venture capital funding process can be extremely time-consuming. But then again, success comes to those who wait.
These are some of the terms that are negotiated in a venture capital funding deal:
- Valuation of the company
- The investment amount
- Form of the investment (usually through stocks)
- Liquidation preference of equity investments – this is the right to be compensated first on sale of the business
- Approval rights or veto powers of investors in respect of future equity financing or sale of the business or any changes to charter documentation
Starting on your startup business journey requires careful planning. Hope this article was of some help in explaining the various startup funding options available.
Also read: Small Business Financing Options