Raising funds for your startup is always a challenging task. No matter how revolutionary an idea you have, the money doesn’t fall in your lap. You must convince potential investors how you will sustain your business model and generate revenue to keep your company running. Many founders are unaware of various options available to raise funds for their startup, which can lead them to a path of financial risks.
Launching any business requires capital investment. Whether you arrange the capital investments from your personal or external resources, you need to manage the cash flow so that you don’t burn through all your funds. Many founders aren’t aware of options to raise funds for their startups. If you are reading this article, it would be safe to say that you know about startup funding, the difference between venture capital v/s private equity, and how startups raise funds. As mentioned earlier, founders can look for various funding options based on their startup’s stage. If you are looking for the same, here are four ways to fund your startup.
When a founder funds their company with little to no assets, it is known as bootstrapping. Unlike starting a business by securing funding from angel investors or venture capital firms, bootstrapped companies rely on their own money, labor, efficient operations, quick inventory turnover, and a cash runway. A bootstrapped business may accept preorders for its product, using the funds raised from the sales to construct and ship the actual product. Bootstrapped businesses reduce their risks by limiting their dependence on external funding sources. They also preserve their entire equity by not onboarding any external investors.
2. Angel Investment
Wealthy private investors, known as “angels”, fund startup companies in exchange for stock. Angel investors use their net wealth, unlike venture capital firms, which employ an investment fund. Angel investors may also be more tolerant of founders in terms of revenue and willing to give lesser sums of money over a more extended period than venture capitalists. However, they expect to see an exit strategy at some point, often in the form of a public offering or an acquisition, to keep their earnings. Here is the list of top angel investors in Indiathat you can use to reach out to angel investors.
3. Venture Capital
In their initial stage, many startups do not have high revenues. Therefore, raising funds based on revenue generation wouldn’t make sense. For startups looking to raise capital but lacking the credit, operating history, or collateral needed to secure a standard loan from a bank, venture capital has grown to be a common source of funding. Venture capitalists frequently take a sizable share in the company called equity, generally along with a critical position in the activity and operations of the business, as these initiatives are a high-risk, high-reward effort. That means they can have their say in all the business-level decisions. Venture capitalists conduct due diligence before investing, which involves examining the venture’s management team, offerings, background, financial statements, and business strategy. Apart from finance, venture capitalists help startup founders with mentorship, networking, risk management and business analysis. It helps to reduce the risk of entering relatively new markets and offers insights to make informed decisions.
4. Private Equity
If you are actively involved in the startup ecosystem, you must have heard about how venture capitalists and private equity are related but not the same. There are differences between venture capital and private equity. Unlike venture capital, private equity firms and funds invest in established businesses rather than startups. Before selling the investment, they manage these portfolio firms to boost their value or extract value.
Capital can be used to strengthen and stabilize the finances, upgrade to new technology, make acquisitions of smaller companies, increase working capital, etc. All these steps are taken to take a company with good potential under its wings, make the necessary changes in the operations and structure and make high profits by selling it.
Institutional and accredited investors are the primary sources of private equity investment since they can commit substantial sums of money over longer periods. Private equity investments frequently require lengthy holding periods to guarantee recovery for troubled businesses.
5. Revenue Based Financing
One of the main concerns for all investors is getting substantial returns on their investments. Therefore they often finance startups through various investment methods like revenue-based financing, also called royalty-based financing. In revenue-based financing, the investors receive the percentage of the company’s ongoing gross revenues instead of the equity in the company in return for the money they invested.
Though the company that raises financing through revenue-based financing is liable to make regular payments to the investors, it differs from debt financing in various ways. The company doesn’t have to pay interest on the outstanding balance, and there is no fixed amount for the payment. The payments are based on how well the company is doing in revenues. And the investor’s payments are directly proportional to the company’s revenues. The revenues-based financing offers numerous benefits to startups, such as more ownership and control of their company, cheaper than giving equity, no large payments, and the founders don’t have to provide personal guarantees such as collateral. That is why many founders prefer revenue-based financing over other financing methods.
These were some of the common ways to raise funds for your startups. Other ways to raise funds include structured loans, crowdfunding, government business loans, business credit cards, peer-to-peer lending, etc. You can choose the right way of funding your startup based on your preferences and current growth of your company.