- October 8, 2021
- Posted by: kshady
- Categories: Business plans, Business Tips, Startup, Uncategorized
Funding is critical to the success of every new business. Financing assists companies in achieving their objectives and focusing on the most important ones. Obtaining inexpensive financing demonstrates the company’s and its founders’ credibility. This article takes a thorough look at startup financing.
Recent research found that more than 94 percent of new companies fail during the first year of operation. One of the most frequent reasons turns out to be a lack of financing. Money is the source of stress in every company. The long, hard, and exhilarating journey from concept to the revenue-generating company requires substantial money as fuel. As a result, at virtually every stage of their company, entrepreneurs wonder, “How can I finance my startup?”
When to seek financing now is mainly determined by the kind and type of company. However, if you recognize the need for financing, below are some of the many kinds of funding accessible.
An Overview of Startup Funding
The world is seeing the development of a very interesting startup ecosystem on a scale never seen before. The rising number of participants, more attention on the industry, and huge financing have made the startup world’s difficulties even more difficult.
As a result, it is appropriate for startups to concentrate and be strategic in their approach, as well as to be armed with a better knowledge of market dynamics and competitive economics. In general, every new company must contend with entrance obstacles such as government regulations, competition, economies of scale to limit fixed costs, product differentiation to block the market, and so on.
However, there are several significant obstacles that a prospective entrepreneur must overcome before purchasing a company. Looking around, we can see that most companies are run by college grads who, we may presume, do not have a lot of money to invest. Once the ideas are written down, finances are required to make them a reality. Furthermore, although they are bright brains with amazing ideas, they are not always individuals with the necessary business acumen or expertise.
Characteristics of Startups Eligible for Funding
Startups must concentrate on and address these risk factors while presenting their company strategy to seed investors.
- Strong Founding Team: The founding team is the backbone of concept execution; any investor will be relieved if the business has a strong, competent, and enthusiastic founding team.
- Testing MVP (Minimum Viable Products) – When a company concept requires more technology or innovation in order to be commercialized, it adds an additional layer of risk to the project. Gathering ideas from an MVP is often less costly than utilizing a product with additional features, which raises costs and risks if the product fails, for example, owing to erroneous assumptions.
- Applicable Legal Framework: To offer greater convenience in this area, any statutes requirements like patents, trademarks, required licenses, and so on, which may lead to delays or problems in the future, should be taken care of before contacting investors.
- Plans that are realistic: Investors are often individuals with industry experts who operate in the markets. It is critical that growth and exit strategies be realistic and supported by real-world facts and trends.
- Comprehensive Business Strategy: The company plan should include all areas of the business, such as sales, marketing, legal, accounting, design, branding, management, and personnel.
The days of being able to obtain funding purely on a concept are long gone. To get funding, you must demonstrate the feasibility of your concept via careful preparation and implementation.
A prototype or a viable product is required (MVP). Before you can qualify for funding, you must also provide proof of concept for your company.
Funding Basic Rules
Not every company is bankable.
Before a business can be considered for funding, it must fulfill a series of requirements. From the investor’s perspective, it can only be financed if it can grow and provide exponential returns.
Funding is not an indicator of success
Despite what the news and the media may lead you to believe, funding is not a predictor of success. Funding is just the beginning. Many businesses in our area have developed without any outside financing. In certain instances, funding is required, but it is not required in all cases.
The work must be sustainable
Your company should produce enough income and profits to support development and expansion, therefore paying consumers should be your main source of cash. You should only seek funding if this is not feasible or if you have a particular need for extra cash.
Reasons for Funding
Increase the size of your business.
Scaling your business in order to grow and obtain economies of scale is one of the most significant reasons for funding. For example, suppose you’ve previously established a company and effectively executed your concept. You may now want to grow your business or your presence. You should think about funding at this time.
Make a competitive edge for yourself.
The second motivation is to acquire a competitive edge over your rivals and achieve a big market share fast. Take, for example, an internet or app company where acquiring users and entering the market is critical.
Organic user acquisition may take a long time, and your rivals may take advantage of this. As a result, you’ll require money to attract a big number of inorganic users.
During the early stages of a business, you’ve probably seen a lot of businesses providing promotions, discounts, and incentives. These strategies are mainly intended to increase market share and establish a dominating position.
Getting a loan to cover your short-term operational costs.
Financing short-term operational costs, often known as working capital, is the third reason. A tiny manufacturing firm, for example, may find itself inundated with orders. Money will be needed for inventory and extra salaries to fund the unexpected increase in output. The money may be returned after the order has been completed and paid for.
Research and development.
The business model may need a large gestation time or intensive research and development in a few particular instances, depending on the nature of the company.
Such businesses must acquire funding from the start, or they will not be able to get off the ground.
Any IoT device that is built to order will require both software development and hardware modification. Both are time-consuming and costly. It will be quite expensive simply to acquire the first batch of goods to test the market, and it will almost certainly need outside financing. This kind of funding is only available if the product is one-of-a-kind and novel.
Aside from these reasons, and with just a few exceptions for exceptional circumstances, proving your need for financing will be difficult. Don’t get sponsored just because it’s hip or fashionable.
Before you seek financing, be sure your company has a solid basis. It’s a recipe for catastrophe if you’re looking for money for the wrong reasons.
Ways and kinds of startup Funding
Every startup runs through these problems. Companies are known to have financial problems before they start producing profits. It is necessary to get funds to set up an office, cover rents, bonuses, and other recurring expenses. It is like looking for water in the desert because investors are always in short supply. It is not a guarantee that investors would be interested in your concept or solution if it is just “unique.” What makes it more difficult to deal with is that investors have all the leverage, and they dominate the negotiations.
1) Self-funding your startup Bootstrapping:
It’s best to start your company by using self-financing, often known as bootstrapping, which is an excellent method to finance your startup. Before trying to get funding, new entrepreneurs typically have to have some kind of enticement and a strategy for future success. You may save your own money or ask friends and family to pitch in. As well as being low on formalities and compliance, this may be raised for reduced expenses and ease of funding. Family and friends are usually more willing to accept a higher interest rate.
When you have your own money, you are linked to the company, and investors consider this a positive feature. However, if the initial need is modest, this is acceptable. For such a company, you may not want to use bootstrapping.
relates Developing an entrepreneurial business from the ground up, including financial and nonfinancial resources, as far as feasible.
2) crowd funding
a peer-to-peer financing New methods to finance startups, including crowd funding, are growing in popularity. Accepting several loans, payments, contributions, and investments in one go is like taking debt from everyone.
Using crowdfunding, an entrepreneur puts his or her company idea on a website and describes it in depth. He will include information about his company objectives, profit-making strategies, how much money he needs, and the rationale for his funding request. This means that customers will learn about the company and be able to profit if they decide to go forward with it.
How can crowdfunding help your business?
One of the benefits of crowdfunding is that it may assist with marketing, which can also boost interest in your product. Not suing in the event of a demand for your goods is a benefit. Putting finance in the hands of the general people eliminates professional investors and brokers. Investing in a campaign may lead to venture capital investment in the future.
Make sure to bear in mind that raising money on crowdfunding is a cutthroat industry, so unless your company is well prepared to engage customers, you may not find crowdfunding to be an option.
3) Funding Startups through Angel Investors:
Angel investors are investors that have a lot of money but a great desire to participate in companies that are still on the horizon. They examine ideas in groups of networks and each group acts as a whole. In addition to providing money, they may also provide assistance or advice.
Google, Yahoo, and Alibaba were funded by the existence of funded investors. When investors anticipate 30% equity, this kind of investment happens in the early phases of a company’s development. They are willing to accept greater levels of risk to get bigger rewards.
One negative consequence of angel investors being a funding alternative is that they are also riskier than other financing options. Venture capitalists invest less than angel investors (covered in the next point).
4) Funding Startups through Venture Capital:
These are the locations you’ll want to put the bigger bets, which are professionally managed funds that invest in fledgling firms with promising potential. Typically, company owners use equity financing to finance the growth of the firm and then leave when there is an IPO or purchase. While venture capital is invaluable in providing knowledge and advice and acting as a baseline test for where an organization is headed, it is only useful in terms of its capacity to help an organization identify where it is headed, based on its focus on sustainability and scalability.
Due to the small company already being beyond the startup stage and currently producing money, venture capital funding may be considered. Investing the money that can be used to swiftly connect and develop a company is something that rapidly-growing businesses like Flipkart, Uber, and others with an exit plan already in place may make tens of millions of dollars from.
Despite these benefits, there are also disadvantages to using VC as a funding method. Investing in early-stage companies comes with a short leash for venture capitalists, and they typically want to recover their money within three to five years. Venture capitalists tend to ignore a business if the product it offers takes more than three years to reach the market.
On the other hand, they try to find larger possibilities with a more solid foundation, businesses with a well-rounded team of individuals, and sufficient traction. Additionally, you’ll have to be flexible with your job, especially if you’re not interested in a lot of mentoring or compromise. This means you’ll have to accept that you may give up more power than you’re comfortable with.
5) Funding Startups Through Business Incubators and Accelerators
Incubator and accelerators programs may be used by early-stage businesses as a source of financing. These applications are commonly available in every major city, and they have been assisting hundreds of companies each year for years.
However, the two words are often used interchangeably, albeit there are distinctions between them. Incubators are similar to parents who help a young company by sheltering it, providing training, and supplying business networking tools. Accelerators are almost the same thing; except incubators assist the company by increasing its growth, whereas accelerators assist businesses by helping them accelerate.
Most of these programs last for four to eight months, and company owners must dedicate time to them. You will also be able to meet mentors, investors, and other like-minded entrepreneurs via this network.
When businesses like Dropbox and Airbnb began, they did so with an accelerator program.
6) Raising Funds by Winning competitions
The number of fundraising possibilities has been significantly increased because of the rise in the number of competitions. Entrepreneurs who have a concept for a company are strongly encouraged to create their own companies. You’ll have to either start a company or develop a product for a competition like this.
When you win these competitions, you may get some media attention. In 2013, when we were a regional finalist at Microsoft BizSpark, we saw tremendous success at ProfitBooks since we had received the 2014 Hot100 Startup Award.
When it comes to these contests, you must draw attention to your idea in order to increase your chances of winning. Presenting your concept in person or developing a business plan are also options. Typically, banks are the first places you turn to when looking for finance.
7) Raising money through bank loans:
The bank may provide funding to businesses in two ways: either by providing working capital loans or by providing financing. An operational loan is taken out to cover the running of a whole revenue-generating cycle. The maximum loan amount that may be applied is typically determined by mortgaging equity and debt holders. Project funding will be subject to the usual procedure of exchanging business plans and project reports in conjunction with obtaining loan authorization.
8) Get business loans from microfinance providers or financial companies
You can directly or indirectly take out small business loans from microfinance institutions or financial institutions that are not banks.
When you do not qualify for a bank loan, what do you do? While the outcome is inevitable, there is still an option. For people who wouldn’t otherwise have access to conventional banking services, microfinance is essentially access to financial services. For individuals who have a restricted range of needs and who don’t have favorable credit scores, it is now becoming common to use cash instead of banking services.