The total number of startups is rising in developed economies and emerging markets. Startup funding is a herculean task, especially in the beginning when the venture needs funding for more than a couple of rounds. Unless the entrepreneur consistently makes profits for a good six to seven months, it is hard to deal with payoffs, operations and other utilities without having sufficient cash flow. This article lists funding options for startups that will help to raise the capital of the business.
Need for Startup Funding
According to the recent study, over 94% of new business fails during the first year of operation. Lack of funding is the typical reasons. Fund/Money is the bloodline of any business/company. The long meticulous yet exciting journey from the idea to revenue generating business requires a fuel named capital. That is why, at almost every stage of the business, entrepreneurs need finance. The entrepreneur requires funding depends largely on the nature and type of the business.
At the very nascent stage of the startup, the entrepreneur should approach angel investors. Angel investors are individuals with excess cash and a keen interest to invest in the startups. Angel investors are helped to start up many prominent companies. Angel investors also work in groups of networks to collectively screen the proposals before investing. They will also offer mentoring or advice alongside capital. This funding system is an alternative form of investing generally occurs in a startup’s early stages of growth, with investors expecting up to thirty percentage equity.
- On foreseeing a promising association, angel investors will invest in the idea.
- Angel Investors are preferred to take more risks in investment for higher returns.
- This funding option has its shortcomings too, spend lesser amounts than venture capitalists
As the name suggests, a venture capitalist is an investor who provides capital to startup ventures and supports small companies that wish to expand but does not have access to equities markets. Venture capitalists are consenting to invest in such companies because they can earn a considerable return on the investments if these companies are a success.
Venture capitalists also experience significant losses when their picks fail, but these investors are typically wealthy enough that they can pay for to take risks associated with funding young, ambiguous company that appears to have a great idea and a prominent management team.
A business incubator is a company that helps new and startup companies to develop by providing services such as management training or office space. The National Business Incubation Association defines business incubators as a catalyst tool for either regional or national economic development. NBIA categorises their members’ incubators by the following five incubator types: Academic institutions
- Non-profit development corporations
- For-profit property development ventures
- Venture capital firms
- Combination of the above
As described here, business incubators are organisations geared toward speeding up the growth and success of startup and early-stage companies. Business incubators programmers consist of industry experts serving as mentors-cum-investors to help entrepreneurs understand the current growth trends.
Self-funding is known as bootstrapping, it is an effective way of start-up financing, especially when an entrepreneur is starting the business. First-time entrepreneurs often will have trouble getting funding without first showing some traction and a plan for potential success.
An entrepreneur can invest from your savings or can get your family and friends to contribute. This will be easy to rise due to fewer formalities, compliances, and fewer costs of rising. In most of the situations, family and friends will be flexible with the interest rate.
Self-funding or bootstrapping is considered as a first funding option because of its advantages. When the entrepreneur has their own money, she/he can tie to the business. On a later stage, investors are considering this as a good point. However, this is acceptable only if the initial requirement is small. Some businesses require money right from the day-1 and for such companies, bootstrapping will not be a good option.
Crowdfunding is a very popular type of funding a startup that has been gaining a lot of popularity lately. It is like taking a loan, pre-order, contribution or investments from more than one person at the same time.
- An entrepreneur will provide a detailed description of his/her business on a crowd-funding platform.
- The entrepreneur should mention the goals of the business, plans for making the profit, fund amount and reasons for applying to crowdfund.
- The consumers can read about the business details and give money if they like the idea.
Those granting money will make online pledges with the promise of pre-buying the product or giving the donation. Anyone can contribute money towards helping the business that they believe in.
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Advantages of Crowdfunding
The benefits of crowdfunding are described in detail below:
- The best thing about crowdfunding is that it can generate interest and hence helps in marketing the product alongside financing.
- Crowdfunding is a boon if the entrepreneur is not sure if there will be any demand for the product they are working on.
- Crowdfunding process can cut out professional investors and brokers by putting funding in the hands of common people.
- Crowdfunding might attract venture-capital investment down the line if a company has a particularly successful campaign.
Also, the entrepreneur should keep in mind that crowdfunding is a competitive place to earn funding, so unless the business is and can gain the attention of the average consumers through the description and some images online, the entrepreneur will not find crowdfunding to work in the end.
Some of the popular crowdfunding sites in our country are given here: Wishberry, Indiegogo, Ketto, Fundlined and Catapooolt.
There are millions of micro-financing firms offering both secured and unsecured working capital loans for startups. The only disadvantage is that they come with higher interest rates when comparing with other startup funding.
Grants – Government Programs
The Government of India has launched many startup funds in Union budget 2017-2018 to improve the startup ecosystem in India. To boost innovative product firms, Government has launched Bank Of Ideas and Innovations program. The government also launched Pradhan Mantri Micro Units Development and Refinance Agency Limited (MUDRA).
- The entrepreneur is supposed to submit the business plan; once the project is approved, the loan will be sanctioned.
- The entrepreneur will be provided with a business card, which is as a credit card.
- By using this card, the entrepreneur can purchase raw materials, other expenses.
Besides, different states have come up different programs like Maharashtra Centre for Entrepreneurship Development, Kerala State Self Entrepreneur Development Mission, Rajasthan Startup Fest to encourage small businesses. Small Industries Development Bank Of India also offers business loans to the MSME sector.