According to a study by the U.S. Bureau of Labor Statistics, 20 percent of startups fail in their first year of establishment and 50 percent within their fifth year. Lack of funding is one of the most common reasons for their failure.
Your business ideas and hard work are only going to take you so far. Raising funding is inevitable to keep your startup up and running to meet your business goals.
Raising startup funding can be an extremely difficult and overwhelming process. You might have a lot of questions in your mind about when and where to raise funds. We are here to break it down for you. Read ahead to explore 10 ways you can effectively raise funding for your small business to take off.
Best Time to Consider Raising Startup Funding
Now that you’re here, you probably have a compelling business idea. Next, figure out if the opportunity is real and workable. Make sure to build the confidence that you can realize your vision. You also need to be working on creating a product or service or should already have one that has at least the minimum customer traction. Do you meet all these stipulations?
Congratulations! You are all set to consider raising funds to give wings to your business idea!
Choosing the Right Fit For Your Startup
When it comes to funding your new project, you have a variety of options to choose from. Each route comes with its very own advantages and disadvantages. So, it is pivotal to take into consideration your short-term and long-term goals, how much funding you need, and profitability targets to know which one to pick.
Here are 10 ways to raise funding for your startup. Read ahead to know the one that’s meant for your business!
10 Must-Try Ways to Raise Funding For Your Startup
Bootstrapping, simply known as self-funding, is the first way to consider raising your startup capital. When you start your new business, you might not have much traction and could find it tough to raise startup funding from outside sources.
Using your funds, personal savings, inheritance, or even obtaining a personal loan can help you begin your business venture. This includes selling or mortgaging your assets and drawing money from your credit card. You can also contemplate receiving seed funding in return for equity or borrowing funds from your friends and family.
Bootstrapping involves no formalities or compliance requirements, and raising pre-seed funding costs less. You can retain full ownership of the business and can independently explore how you want your new business venture to take form.
However, using your savings or assets will tie you down to the business and increase personal liability. You will also be risking your relationships with your friends and family from who you borrow. Regardless, for the early stages of your startup, the perfect choice is to self-fund.
Traditionally, founders of a startup can raise small amounts from a large number of people through crowdfunding sites like Kickstarter, Indiegogo, Patreon, Crowdfunder, GoFundMe, Fundable, and so on. There is no obligation to repay or disburse equity stake to the backers. They are offered the opportunity to participate in the venture through gifts, products, or recognition. With just some marketing skills and networking through your social circle, you can easily obtain working capital for your business.
The Jumpstart Our Business Startups (JOBS) Act of 2012 gave a nod to securities-based or equity crowdfunding. The Act places a ceiling on the amount that can be invested and raised as seed funding. Your startup can offer and sell securities to the public during early capital raising activities. All seed funding activities shall take place online through an SEC-registered intermediary, either a funding portal or a broker-dealer, which shall be regulated by the U.S. Securities and Exchange Commission (SEC).
Individuals with a high net worth, called Angel Investors, invest in new or small businesses if they can foresee considerable returns. They provide startup capital in exchange for debt, equity, or even partial ownership in the start-up. They usually offer mentorship but do not interfere much in your day-to-day functioning. Sometimes, groups of angels pool their resources and hold different events for entrepreneurs to offer seed funding to startup companies.
Rule 501(a) of Regulation D of the Securities Act of 1933 limits angel investing to accredited investors. Accredited investors are individuals with:
(a) a net worth of $1,000,000 in assets; or
(b) having earned $200,000 in income for the previous two years, or
(c) having a combined income of $300,000 for married couples.
506(c) permits general solicitation to offer securities to accredited investors. Make sure to verify Angel’s accredited status to protect your interests.
Venture Capitalists are private equity investors. Professional investment managers manage venture capital funds on behalf of institutional investors called limited partners (LP). Venture capital firms and funds strive to gain maximum returns on their investments and thus involve high risk. So they will demand significant ownership of your business in return for seed funding and will exercise greater levels of control.
You will be required to incur legal costs to be funded by a VC firm on account of the preparation of legal documents and due diligence. Due to the large volumes of money raised and the costs involved, VCs are ideal for high-growth companies.
VCs are regulated by the U.S.SEC and must adhere to insider trading laws. Financial institutions providing venture capital are subject to anti-money laundering and know-your-customer (KYC) regulations.
Family offices are privately held companies or firms that manage the wealth and investment of ultra-high-net-worth families/investors. They are a hybrid mix of venture capital firms and angel investors. They inherit the flexibility of an angel investment but offer higher amounts of startup capital.
Family offices are driven by particular missions and are more focused on specific industries. Beyond startup business funding and networking in the industry, they don’t offer much. If you are looking for a huge investment with little intervention, this is your safest bet.
Incubators and Accelerators
If you are a new founder with a great idea but do not yet have a business model or plan, Incubators can help you figure it out. Accelerators can guide you through it if you have a business plan and a model in place but lack connections to find investors, partners, or resources.
Incubators and Accelerators offer training programs, office space, mentorship, and/or funds to startups. They can help you with accessing capital, operations, and marketing. These sponsors are usually university authorities or organizations in an industry. They require you to enter into their programs for a fixed period and work alongside them.
If an accelerator or incubator demands you to trade equity for startup funding, ensure that you consult a legal professional.
Loans, Credits & Grants
Banks offer small business loans, secured and unsecured, which can be one way to meet your startup funding needs. However, you will be required to have a long-standing track record and submit clean bank statements denoting your business history and sometimes personal tax returns. If you already have a good rapport with your local bank, procuring a traditional business loan can become a little easier. Obtaining a business credit card can help meet operating expenses.
Another way of raising capital is through loans and grants offered by the U.S. Small Business Administration (SBA), which was established by passing the Small Business Act of 1953. The SBA was set up to assist and protect the interests of small businesses. The SBA offers training, management, and technical assistance to startups. It supports business owners who are women, minorities, and armed forces veterans.
SBA offers a range of loans, investment capital, small business grants, and financial assistance. Obtaining funds from SBA-sanctioned programs can be competitive. Finding localized loans and grants can increase the chances of you successfully obtaining them.
A strategic partnership involves sharing of resources between individuals or companies to help each other. Manufacturers, suppliers, distributors, and others involved in your supply chain play an active role in your business. Inviting them to partner up with your new business can help you cut costs and provide better services.
Entering into legally binding contracts will prevent ambiguity and ensure smooth business transactions. Find what you can offer to a potential strategic partner and watch how you grow together!
Business contests and competitions are getting increasingly popular. While some offer cash prizes, others reward you with free or discounted services from vendors and advisors.
You will be required to present a business plan or launch a product. You can safely test your ideas and receive constructive feedback. You will always have the opportunity to network better and identify skills you need to improve. Winning contests can even bring you some media coverage and free marketing.
Have you noticed how some companies start pre-orders for their products even before they are officially launched in the market? How about pre-booking movie and event tickets?
Pre-Sales always seem to create hype about the product and help businesses improve cash flow. Offer pre-booking of your products and services before their launch. This is one of the most efficient startup funding options if you need to raise money for your small business.
Best Practices While Raising Funds For Your Startup
Investigate, check, review and confirm all facts, details, risks, and compliances involved in all your funding rounds. Regardless of how you raise your startup capital or seed funding, due diligence will help you with the deal you are being offered and will protect you from risks. If you are receiving startup funding from an angel investor or venture capital, hiring a lawyer to safeguard your business interests is pivotal.
Legally Binding Contracts
As a business owner, inculcate the practice of entering into legally binding contracts with anyone you raise startup funding from. This can eliminate ambiguities and disputes that may arise in the future. It will also protect you if any legal disputes arise.
The primary requirement that any investor would have is to view your startup’s books of accounts. Make sure you hire a professional to regularly comply with bookkeeping standards and regulations. Procuring series B funding will become easier as your business expands, given you maintain the books impeccably.
Other Fundraising Rules To Keep in Mind
We hope that this article helped you understand the basics of raising funds for your startup. Here are a few other things to keep in mind going ahead.
Most people lose track of where they direct their efforts towards. Make sure to find the perfect balance between focusing on fundraising and building your product and business. You then need to build your business pitch with all your passion. Delivering your pitch is what will fetch you the belief of your funders in your ideas.
Meet the most number of investors you can and build a good rapport with them. You never know which will be your winning streak. Never hesitate to follow up after your first interaction with potential investors.
Get creative with your fundraising and assertive with deal negotiations. This will help you land what you need from your investors.
Once you’ve raised funds to your target, budget to make the best use of all financial resources at your disposal, and don’t stop after the first funding round. Plan ahead for business development and series B funding.
Stay organized and consistent with all your efforts. With determination, hard work, and persistence, you are set to succeed in your startup endeavor!