A specific feature of a startup company is a chronic lack of finance, the absence of a reliable material base, and the company’s precarious position in a large market. This article will analyze the various ways of funding startups.
Startup: how to choose the right source of financing
Most young businesses fail. There are various reasons for this, and financial difficulties are the second most common among them. For the active development of any startup project, financial investments are necessary. The amount of material needed increases directly to the company’s growth. At the first stage of the idea’s implementation, several thousand dollars may be needed, and in the development process, the amount will increase to millions.
To solve problems with “cash,” entrepreneurs can turn to bank loans, venture capital funds, business angels, and acquaintances loans. However, each so-called “traditional” way of financing has its limitations: collateral or guarantees are needed to obtain a loan, venture capital funds are now in the company at an early stage of development, and the consequences of loans from individuals are unpredictable. Crowdfunding and other alternative financing methods will save a young company from a lack of funds.
Sources of startup financing
Finding a source of funding is an important task when creating a startup since the project’s further development depends on the availability of material support. Currently, young startups are turning to “Networking” to find potential investors. This concept refers to core conferences and events aimed at studying promising projects. Any company that senses potential in its startup project can take part.
So, the main sources of startup funding are:
- Venture funds
The main potential investors of startups are venture funds created specifically to finance startups. However, some difficulties arise here since, to receive a loan from a venture fund, the company must already be at a certain stage of development, have a reliable reputation, and have the final product version. Therefore, its place in the market plays an important role.
- Business angels
Another source of funding for a startup company is business angels. This concept refers to individuals who invest in a growing business early. Their goal is to make a large profit in the future, and therefore business or investment angels do not insist on an urgent return of capital. In addition, they do not interfere in the process of doing business.
- Family and friends
It is a traditional source for short-term credit or long-term financing. It is often the easiest and fastest option. But it is out of reach for many and can cause strain in relationships even with those closest to you if the business runs into difficulties. Moreover, there are no return guarantees if the company cannot repay the loan. Therefore, this option will not work if the founder cannot confirm the obligations with his personal property.
- Сrowdfunding
Crowdfunding is a way of collective financing projects. Projects can be anything: creating an animal shelter, filming a music video, making snowboards. Fundraising ends when the project expires or when the founder closes it early. If the entire amount has already been collected, but there is still time, backers can continue to invest. It is not a standard investment when looking for large capital and concluding agreements with investors. Crowdfunding is usually used to promote creative projects or business projects on special terms. Crowdfunding is active today. There are various crowdfunding sites where you can register your ideas and projects. The amounts collected through this process have increased significantly and can be measured in millions of dollars.