A Complete Guide to Secure Startup Funding

This is the age of startups! The success of startups is proof enough and their success speaks volumes. If John Paul deJuria could jump back from being homeless to being the owner of two billion-dollar worth companies, you could definitely proceed with your startup and succeed at it nonetheless.

Having an avant-garde concept or an idea for a startup is the basic that can be conceived pretty easily (if enough thought is put into it). Finding a co-founder, devising strategies, erecting a business model as per it is also very doable.

The major challenge for any business or a startup in its initial, neonatal days is to secure funds.

As per data collected by SmallBizTrends, 82% of businesses and startups fail due to the lack of funding. 

To nourish a startup from the ground up with adequate funds is essential to put ideas into concrete actions. Funds and capital is the vital need of a business to survive and stay afloat. Also in the case of a co-founder or partner, the business solutions, concerned with the division of responsibility and funding is divided and becomes a less stressful task.

As per data by Inc, a business or a startup with 2 co-founders raise 30% more capital as compared to where one person in charge.

Many startups are not able to find a suitable investor to secure funding from any domain and consequently lose hope. A split of all the small businesses started in the United States can survive through the fifth year of their operation. Out these halves that survive the five-year mark make it to their tenth year as per statistics.

As an entrepreneur, you ought to be smart and catch up with the changing trends and satisfy all your funding sources with your business ideas.

As per a report by Failory, 90% of all new startups fail. To be in the creme de la creme, surviving 10% of the startups, consider the following areas to secure funding for your business.

Infographic

Heading- Successful Funding Sources

Introduction – A comparative analysis of various sources that provide funding for business.

Sources and Percentage of startups they Funded –

  1. Family and Friends – 38% = $23,000 avg invested amount.
  2. Venture Capital – .05% = $5.94MM avg amount invested
  3. Angel Investors – .91% = $143, 899 avg amount invested
  4. Bootstrapping – 57% = $48,000 avg amount invested
  5. Crowdfunding – $7,000 avg crowdfunding campaigns size.

Source – centre for venture research, US Small Business Administration, Angel Resource Institute, Angel Capital Education Foundation.

There is not one but many ways through which startup can obtain and secure funding. Look through all the paths that you can explore for your startup and securing funding for it.

Incubators and Accelerators

Incubators provide startups with much-needed advice and guidance. Those startups in their initial phases benefit a lot from these incubators, as they provide both financial as well as nourishing aids. Their multidimensional support is very broad and covers the basic needs of your business to the advanced ones. The startup ecosystem consisting of those very fresh ones can make huge benefit from these incubators.

As per data by ReadWriteWeb, the US alone consists of 1000 incubators and more.

A startup can expect from a collaborative program like an incubator to solve all their key needs of workspace, training, funding, access to investors, guidance and mentoring, among others. Both public and private figures run these startup incubators which are non-profit organisations.

The accelerators are often considered synonymous to incubators but they aren’t. Accelerators are better than incubators in the sense that they have much polished and defined agenda and program structures. If any startup is on the hunt for some quick fixes, the accelerators provide short term support and services along with expert guidance.

A notable difference between incubators and accelerators is the structure of their individual programs.

Bootstrapping

This is the most common technique that all startups have to and must always implement. Bootstrapping means using your personal, saved up funds and investing them in, for business purposes. This is the most easily accessible source of funds to go for and monitor too.

As per SmallBizTrends, in 2018, the most sought after method for financing business was the utilization of personal funds. As a financing method, it alone contributed 77%.

Quite simply, bootstrapping is called self-funding.

If you have a good amount saved up, bootstrapping should be a primary funding option. Although it is not applicable if you are looking to fund a large scale business. But bootstrapping is a great initial source to fund your early startup needs. There is no bureaucratic involvement or hurdles as well. With bootstrapping, your business will get the push it needs.

Bootstrapping has worked out immensely at the beginning for many entrepreneurs. This very well commonly flunked around the term in business, not only involves the use of existing, saved cash or funds but also other aspects and things that can be self-provided. For example, if your startup lacks an infrastructure, the use of an existing garage space falls under bootstrapping. The use of any prevailing electric appliance, readily available which can serve as a prerequisite is also a part of it.

However, if bootstrapping, it is not wise to withdraw all the available cash. Take it from wise entrepreneurs, they save some for the emergency fund too. Moreover, a disciplined approach should be followed as far as money withdrawals are concerned. Keep a budget.

Statistics show that somewhere around 77% of small businesses use the bootstrap method. Only about 40% of these have been able to produce a profit.

Make optimal use of the existing resources and be mindful of what all can your startup make use of if bootstrapping is the initial way to secure a fund.

If you consider bootstrapping as an option, it should be done systematically. Firstly, all the unnecessary areas which suck the financials must be done away with. For example, a startup, in the beginning, should just be about networking, marketing, research and hard work. Building up a fancy workspace isn’t a dire need. For this many coworking spaces are trending and they cut the cost of infrastructure too. The overhead expenses like such could be eliminated easily.

All over the world there exist somewhere around 35,000 coworking spaces and this number is expected to grow by 6% annual rate in the U.S. and 13% in other places.

Secondly, making use of a way of funding that allows for a debt to weigh in overtime must never be considered an ideal solution. As per fluctuating opinions, a popular misconception is that if bootstrapping, it is acceptable to make use of credit cards. This trend only leads to more and more debt and a loss of ownership of the business over time. A clever mantra to follow, as far your startup hasn’t picked up the pace and is not raising capital, is to remain debt-free as much as possible.

Thirdly, when running a bootstrapped business, all the payments should be scrutinized extensively, and a proper research is considered ideal when making both big and small investments. Letting guard down any time can prove to be a big mistake. Even if your startup successfully raises capital, look properly into the arenas before putting in investment. Many bootstrapped companies are doing tremendously well like eBay, Cisco, Zoho, Facebook Inc, Apple, Oracle, SAP and are the ones that started with bootstrapping their businesses.

Family and Friends

Another popular way of securing funds for your startup, if the volume of your personal savings seems to hit the pan, is by asking your friends or family. This might not seem like a good option, but many times, the possibilities of getting a loan from a friend/family and that too on low interest or no interest rate may just be the right kick your startup could ask for. Friends and family make up as personal investors.

Make use of your network, as friends over time develop a certain trust factor towards you or maybe interested to invest in your startup. Another possibility being the fact that a wide network of friends may actually see potentiality in the service or product you sell. This is another advantage of networking and spreading the word about your startup.

As per SmallBizTrends, around 16% of all small business financing methods are borrowings from friends or family. Approximately 9% of the total small business financing figure, are donations from family and friends.

If help from your friends or family does not come to extend for monetary solutions, they may, to a large extent be responsible for spreading out its reach. The more people know about your startup, the better.

If your friends or family are ready to fund your startup, you must ask for a nominal amount and be acceptable of however big or small amount they deem fit to offer.

Next, you ought to be open and honest with them regarding the risks involved. Don’t hesitate to ask for money either. Put across your business idea and if they like it, pursue them to become an investor by providing aid for your startup one way or the other.

Funding by friends and family account for the second most utilized method of funding and contributes somewhere around $60 BB.

As a startup funding source, friends and family fall second in number, below bootstrapping in the United States.

Investor Funds

Funds by investors is a major source of investment. It is the investors with their large pool of funds that contribute to business growth and expansion. But this investment is in exchange for stakeholding in the company or equity.

Investors, both venture capitalists and angel investors, are interested in the return that a startup or a business can yield. Therefore, only by looking at the potential and growth aspects will an investor agree on investing. 

You as an entrepreneur when steering your company must look and explore the various types of investors pertaining to your business requirements.

Venture Capital

Venture Capital is yet another method through which startups can secure funding.

Venture capital is a form of private equity. They are a very popular means to attain seed investment, early-stage and later-stage investments and are ideal for startups and entrepreneurs seeking investment to boost business.

As per statistics by SmallBizTrends, venture capital accounts for 3% of all the financing methods.

Venture capital firms look for arenas and businesses offering high growth prospects and potential. All VCs also known as private equity, get a stake hold or equity in the startup or business they invest in. The benefit that these VCs get is in terms of good returns on the further growth, prosperity and expansion of the business or a startup.

When seeking to fundraise through a venture capitalist firm, presentation of facts, innovation and ideas backed up by statistical evidence is extremely needful. All a venture capital firm looks for, before investing their millions into a startup or a business, is the uniqueness of thought, the ground the service or the product covers, and the growth that it is capable of. Many company giants like Swiggy, Paytm, BookmyShow, OYO, OLA, OLX, Snapchat, all raised funds through venture capitalist firms.

As per statistics by the National Venture Capital Association (NVCA) 2019, around a total of $131 billion was raised through 8380 Venture Capital Investment deals.

The VC fundings are done in 4 stages, starting from seed/concept funding where funding is needed for completion or development of a product or service. In seed funding, the idea gets funded to fully grow. After the seed stage, there are stages 1, 2 and 3 respectively, which progress as per the maturation of the business or the startup. Choose the type of funding according to the stage your business or startup is currently in and approach a venture capital firm with your business prospects accordingly.

Industries with the most power to rope in venture capital (as per an analysis of 4,164 VC investments in the United State) 

Software – 36.2%

Biotechnology – 17.3%

Medical & Entertainment – 9.5%

Medical Devices & Equipment – 7.1%

Information Technology Services – 6.0%

Industrial Energy – 5.8%

Consumer Products and Services – 3.9%

Financial Services – 2.6%

Networking & Equipment – 2.1%

Telecommunication – 2.0%

Source – Martin Prosperity Institute

As per Crunchbase, in Q2 2019, there were 5,481 seed-stage deals, with a total of $3.92 billion being invested overall.

As entrepreneurs, it is definitely needed to do some research and find the best venture capital or investors. Dig in deeper and lookup records of a VC’s past, its prevailing investments and the stage of business they generally invest in. A VC’s portfolio will deliver all this information. Look for the credibility and flexibility of the funding when picking out ideal venture capital for your startup.

Securing funding for your business or startup by raising funds through Venture Capital is a difficult task, as many VCs don’t easily go for young startups and business. It is often that growth and freshness of an idea teamed up with fertile market opportunities, that convince a VC to take up fundraising for a startup.

Angel Investors

Investments by affluent individuals in a startup or business in return for convertible debt or equity of ownership are called angel investors. These are individuals that you as an entrepreneur would be lucky to have. Because these wealthy individuals, with their spare cash, look for good returns in exchange for investment.

As per SmallBizTrends, angel Investors account for 3% out of all the financing methods.

An angel investor gets an equity position in the company that accepts his investment. The biggest blessing that your startup can ask for is investment through an angel investor. Investment through an angel investor is much less risky. But as an entrepreneur, with an angel investment backup, there is a share of ownership that tags along too.

Member of friends and family pooling in large resources also can be termed as angel investors.

As per a study, about 22 per cent of total angel investors are women.

Your startup or business can excel if obtained funding from an angel investor. However, it is up to your presentation of the business idea, concept or the value of a service in the market, which will attract your angel investor or a venture capital firm.

Angel Investors vs Venture Capitalists

Introduction – An amount of $21 billion is invested in 60,000 businesses in a year.

Venture Capitalists put in $30 million in about 4,000 in the same period of a year. Total angel money invested in a year is 21B

The average angel round sums up in 345k and each deal is sealed in 37k. (the average angel investor income is $90,000, with an average net worth of $750,000. The average investment each round falls roundabout to $37,000 per venture.

The total VC money per year is 30B. The average size of a VC fund is 149M. Each deal is sealed in 7.5M each.

Source – Angel Capital Association. FAQ 2011

NVCA.org FAQ 2011 | Easel.ly | Equity.net

Crowdfunding

Crowdfunding is a fairly new method to raise capital or funds for your business or a startup.

As per the 2016 reports of Alternative Board Tab Small Business Survey, only a small 1% businesses in India make use of crowdfunding.

As is evident from the name itself, crowdfunding is an alternative for raising funds and makes use of multiple investors or people willing to donate. The process of crowdfunding is carried out via different platforms with many forums and websites in place. Crowdfunding is entirely a web-based phenomenon and operates in such a way through social networking sites as well or well established dedicated platforms, that can attract the attention of investors. It is done by giving potential public or investors some insight into your business or startup. Details pertaining to your venture, product or service are shared, along with the future prospects, the investment tiers and the progress made so far.

Those interested can get in touch via these crowdfunding platforms and be directly connected to the founder/founders or the startup company for providing funds. To make use of these crowdfunding platforms and websites, all the eager businesses and startups would have to pay a fee and make use of its services. The key concept of attracting large investors if you consider crowdfunding, is to give magnetic attributes to your idea. The goal for you as a founder should be to make/present your idea distinctive, attractive and growth laden as possible.

Going by statistics provided by Fundly, the crowdfunding campaigns that make use of videos raise double the funds, and gain 105% more when compared to those with no video utilization.

There goes a lot of effort into raising crowdfunding and continuous efforts need to be put in even afterwards too. It is a duty from the startup or business to keep all the investors involved and informed. Many businesses like Oculus Rift, The Dash, Pebble Smartwatch, 3Doodler, Bitvore, PonoMusic, OUYA, Canary all grew with the help of crowdfunding by either Kickstarter, Fundable or Indiegogo.

Crowdfunding can be of great help as it helps to get small funding in large amount from an array of sources.

As per SmallBizTrends, as per 2018, the popularity of crowdfunding is 2% among all the small business and startup funding methods

Going by the statistics above, even though crowdfunding is fairly new and in its developing phase, it’s feedback as an option for securing fund has been thoroughly positive.

The crowdfunding as a method for raising funds is developing and allows potential investors to invest in the start-up or business of their choice. There is no maximum or minimum limit to the investment. Websites like Kickstarter and Indiegogo are trustworthy platforms for crowdfunding.

As per Indian laws, there is a ban on equity-based crowdfunding, while the RBI manages the peer-to-peer lending.

Crowdfunding is a great method to see the weight and attractiveness quotient of your business or startup idea too. Productive feedback can be obtained from all the investors who invested.

Title – Crowdfunding Statistics of 2017

Percentage of crowdfunding per industry

  • Business and entrepreneurs – 41.4%
  • Social Causes – 18.9%
  • Films and Performing Arts – 12.2%
  • Real Estate – 6.2%
  • Music and Recording Arts – 4.5%

Source – Massolution

Crowdfunding to raise seed capital is a very trusted method. Nonetheless, it gives your business or startup the validation and social proof of authenticity it needs.

There are 4 types of crowdfunding to choose from –

1. Reward-Based Crowdfunding

This type of crowdfunding involves giving off a product or service and other benefits to the investors. The idea to provide a free service or a product in reward for investment, alongside keeping the investors involved and engaged. If not provided for free, the investors get special discounts and exclusive offers.

The product or service offered as a reward serves as an incentive for the investors and also helps in reaching as many in the audience as possible.

Commonly seen in businesses like apparel, jewellery, beauty products, bags, stationery and lifestyle products. The rewards can be in any form, as long they are lucrative enough to the investors.

2. Equity-based Crowdfunding

Here, equity is provided to the investors instead of rewards in the form of a free/discounted product or service usage. Gaining equity is a better option, keeping in mind the returns that come along with the growth of the startup/business in the future.

This crowdfunding is ideal for businesses involving a certain risk factor or the ones involving a complex niche stricken product or service like an app, or products that utilize complex, intricate technology. It is up to the investors to be well aware of the technology or the product in question.

3. Lending Based Crowdfunding

In this type of crowdfunding, the investors get equity share just like equity-based crowdfunding but against a fixed rate of return.

4. Pre-order Crowdfunding

The pre-order Crowdfunding is where the investors get to pre-order the service or the product they invest on. These investors get their hands on the product or service, quicker than others in the market. Moreover, their honest feedback and reviews can help in quality improvement.

Donation or Social Crowdfunding

This kind of funding is done for charitable purposes or social causes. Only certified nonprofit organizations get to proceed with donation-based crowdfunding. Funding raised for noble causes like an upgrade for a shelter house, for the provision of aid in a disaster-stricken area, helping patients, providing healthcare, environmental cause, among others, qualify for the donation or social crowdfunding.

Based on the business or startup type, entrepreneurs can choose the type of crowdfunding they would like to go for. There is a lot of potential in crowdfunding as a method of securing funds for your startup.

As per Statista, there was 33.7% increase in funds raised through crowdfunding in comparison to last year.

Conclusion

All in all, there are several ways that an entrepreneur can fix their businesses with capital and funds.

It is up to the entrepreneurs to lay down their business details and present them in such a manner which does not only seem attractive but also appear lucrative to a potential investor.

Additionally, much thought must go while choosing a type of funding for your startup. Each funding is different in its approach and will aid as per its eligibility criteria, obviously if a startup is not bootstrapped. A startup must explore all the possible arenas to secure funding and trust the various sources wide and open.

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