Every business needs funding, a point that’s especially true for startups. In the same words, choosing investment sources for your startup is such an important role. Because it could be a pointless and hopeless assignment unless you have the right and even deep knowledge. Only when you reach that, you would know how to play your business to appear in the proper places for the suitable type of funding and get your startup precisely wherein it needs to be.
If you are a startup looking for an investment to run your business, you may hear about Venture capital funds and Angel investors. However, there are not just only two kinds of fund sources for your business. In fact, besides VCs and Angel investors, a startup can receive investment from other manners. This post will help you understand more about what types of funding your startups need to know.
When your founders use their own money and assets to raise funds, it’s called bootstrapping. Bootstrapping describes a situation in which an entrepreneur starts a company with little capital, relying on money other than outside investments. An individual is said to be bootstrapping when they attempt to find and build a company from personal finances or the operating revenues of the new company.
Founders who choose this sort of startup investment accomplish that to save you 1/3 parties from gaining pursuits or stocks of their companies profits.
Crowdfunding is when raising the initial investments from the founder’s friends, family, individual investors, or even customers. In this new generation, the crowdfunding mechanism is typically done primarily using media and other funding platforms. With the rise of social media and other online crowdfunding platforms, entrepreneurs will have a single streamlined platform to showcase their business pitches to interested parties.
Crowdfunding is the way ahead for many people with an enterprise concept and little-to-no investment. Crowdfunding is a type of investment wherein non-public backers (individual traders) purchase your service or product earlier than it is to be had. This offers business proprietors an idea of the danger to fund their challenge in the alternative to supplying that services or products to their backers.
This method involves founders raising capital through borrowing cash. Loans are the most commonly used source of funding for small and medium-sized businesses. Consider the fact that all lenders offer different advantages, whether it’s personalized service or customized repayment. It’s a good idea to shop around and find the lender that meets your specific needs. There are two major types of this fundraising method:
- Small business loans: rising businesses avail as they have lower interest rates. Small business loans are similar to personal loans, meaning you’re approved for a set amount of funding with an interest rate attached.
- Asset loans: This debt funding raises higher capital than small business loans by borrowing cash against collateral. The said collateral can be the founder’s asset or the assets of someone involved in the business.
Incubators and Accelerators
For founders, this type of investor can be their gateway to the other investors in this list. Incubators focus more on helping startups or individual entrepreneurs in refining their ideas and establish their business plans. They also help founders work on their product and service market fitness and identify possible issues.
Meanwhile, the function of accelerators is to help startups hasten their development. They may provide a set timeframe to mentor and fund startups. Both accelerators and incubators aim to speed your startup company to the next stage.
An angel investor (private investor or seed funder) is a high-net-worth individual, who invests their own money into startups. They mostly fund into an early-stage (seed stage) business when the company exists only as an idea or perhaps when the running up is initially in place.
Apparently, this is the most important phase of a new business to survive in the market, and faces a bunch of challenges. The fundings help startups grow and sustain in the critical stage of development until the companies require more sizable investments from venture capital firms for the next stages. As the name of angel investors, they might not be mainly on profit like a venture capitalist but could invest to exchange the ownership equity or convertible debt.
However, some seed funders pour their money into a startup merely to supply the finances that push the company’s development. Because of the comprehension of the founders who need to hold the highest stake to encourage their companies to succeed, angel investors don’t usually acquire more than a 25% stake in the company. Furthermore, the business owners will not be required to repay if the companies go belly up.
Venture Capitalists are the most well-known with startups in early-stage fundraising. Unlike an angel investor, a venture capitalist pools funds from other investors called a limited partner (LP), and perhaps, in addition, their own money. They can write larger checks than angel investors, which could reach 100 million dollars for the company.
Indeed, venture capital basically invests in new businesses with breakthrough ideas with high potential for growth and advancing social progress in the long term, but coevally containing a substantial amount of risk enough to scare off banks to fund.
However, as the above saying, even venture capitalists are gamblers who could hazard into very new ideas, they usually don’t want to jump into the idea stage because of the risk and lack of conviction. In this case, venture capitalists tend to wait until getting a proof of concept in hand, then do due diligence before deciding to invest. Metaphorically, they are the high experts at hunting a ‘unicorn’ among a herd of horses.