Startup Funding: Everything You Need to Know About Raising Funds
As an entrepreneur, you need three ingredients to build a successful business from scratch: a brilliant idea, the drive to transform that idea into a profitable business, and the capital to get the wheels in motion. The last of the three is the hardest to acquire. Yes, startup funding is what we are going to discuss in this post.
However, before we jump into the ‘how’s’ and ‘what’s’ of startup funding, let us first understand how every stage of the life-cycle of your business impacts and determines how much funding you can acquire.
Stages of a Business Cycle that Impact Startup Funding
Stage 1: Conception and Idea
At first, your idea may seem bulletproof and it may sound like the perfect business. This usually happens because you are excited, and your emotions get the better of you. However, if you look closely, there may be flaws and loopholes that you haven’t addressed.
Often, these issues are large enough to deter your idea from taking off. You need to ask yourself if your idea is worth the investment you are seeking. Deep diving into your idea and performing a thorough market research will help you understand your strengths and weaknesses and will help to tighten any loose ends.
Stage 2: Business Planning
Once you’ve tweaked your idea to make it more viable for the market, the next stage involves creating a watertight business plan. Your business plan is essentially an accurately drafted document for your plan of action and serves as a blueprint for your business. A business plan also serves as an important legal document for your business.
With a business plan, you will be able to address concerns over how much you need to make to break even, what are the risks and investments involved, how much profit there is to be made, what overheads and expenses you need to sustain in the long term? Once you have answers to these questions along with a supporting business plan, you can attract investors and look for startup funding.
Being a startup entrepreneur, you know the significance of every dollar. While executing your core competency is a principal factor for business success, it is equally important to market your business effectively, and that's where marketing tools come into the picture. One of the key advantages startups are looking for is a competitive edge over their competitors.
Stage 3: Prototype Development
The third stage involves transforming your idea into a prototype that your investors can study before investing in your business. Building a full-scale working prototype of your product will require personnel expertise, technical skills, time, and capital to get everything together and make it happen.
In case you don’t have the skills to develop your MVP, you should consider partnering with someone who does or an agency that can help you with it. Your startup funding success depends heavily on who you partner with and how good your product is.
Startup Funding and How to Get it
For student entrepreneurs and other first-time risk takers, starting a business is an exciting journey riddled with potholes of risk and setbacks. It’s advisable to start with the money you’ve saved over the years. This reduces the risk of getting trapped in a debt that you may not be able to come out of in case your business takes time to set off or even worse, fails to take off.
Investing your own money will ensure that you’re stress-free and will help you to creatively focus on building the business without having the sword of debt dangling over you. Bootstrapping will help you plan better and to create your product and business the way you want to.
2. Family and Friends
Now, while asking your friends and family for money isn’t an easy thing to do, it’s better than asking for a bank loan or turning to a loan shark for help. Asking those closest to you isn’t a bad first step to help you get some extra moolah to cover expenses that are straining you.
While Aunt Judy might not be able to finance your new project, she can throw in a few grand to set the ball in motion for you. However, if you have a bulletproof business plan ready, you can share it with your friends and family before asking them to chip in. This way, you can explain your game plan and how you plan to repay them.
3. Bank Loans
You can opt for bank loans in terms of credit cards or overdraft facilities to support your expenses and keep the ball rolling. However, using plastic has its implications if you are unable to repay the bank. Not only will you have exhorbitant interest charges, but your credit rating as a business will also witness a downgrade.
When it comes to borrowing a hefty loan amount from a bank, you will need to submit extensive paperwork and will probably have to mortgage your assets to show that you are good for the money. In case you fail to repay the minimum amount, things can get very stressful.
Figure out who your online target audience is Every business is different. The online strategy for a handmade soap store is not going to look the same as the online strategy for a motorcycle retailer. First, you need to figure out who your target market is and how best to reach them.
4. Angel Investors
Ideally, you should look for an angel investor. An angel investor is an individual with a high level of income looking to invest his/her own funds towards developing young businesses in exchange for a share of the profits or for equity. Angel investors are usually high-risk takers and don’t mind investing in businesses as early as in the idea/conceptual stage.
Business angels can either be private investors who act independently or individuals who invest on behalf of an organization or are united in a syndicate. Angel investors and Venture Capitalists (VCs) also bring in a wealth of knowledge and experience.
However, before you enter into a deal with them, be sure to clearly establish the percentage of profit or shares that you are willing to part with. A sound negotiation is must to ensure that both parties get the best out of this.
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I'm smart at getting to where I want to go, and I can teach you how to do it! I had 22 jobs before starting my real estate company with a $1000 loan and built it into a $5 billion business. Today I'm a 'Shark' on ABC's hit show "Shark Tank."
Crowdfunding is a smart way to raise funds for your startup. The biggest plus point of crowdfunding is that none of your so-called ‘investors’ is actually a shareholder. The downside is that the amount raised is limited and will vary on the minimum contribution made by people. Crowdfunding offers entrepreneurs and startups a unique opportunity to raise funds without having to take many risks.
6. Startup Accelerator/Incubators
Startup accelerators and incubators in the likes of Y Combinator, TechStars, Brandery, and Idealab make for a few avid startup supporters. Accelerators offer startups with a pool of resources such as access to investor meetings, industry experts and influencers, and coworking spaces. When it comes to incubators, they can be supportive towards a specific market or industry.
For example, an incubator sponsored by a fast food chain company might only look for startups in the food tech space. In other cases, incubators and accelerators are specific to a particular geographic region. Just like IPN is for Portugal based startups. All in all, turning to startup support initiatives such as accelerators and incubators can help you with startup funding.