The easy part of starting a new business is coming up with a new innovation or ingenious idea that can solve a problem.
While there are several advantages of being an entrepreneur, the real crunch comes when they are ready to convert that idea into a profit-making company.
To make that happen, the first thing needed is funding. Personal savings are a great starting point and essential to convince investors of the entrepreneur’s intentions.
But since startup owners typically have a limited amount of funds, they must rely on outside sources of investment for the concept to materialize. Here’s a quick look at the best funding sources available in 2022.
Venture Capital or Private Equity
Relying on private equity or venture capital (VC) for funding has several benefits for a startup owner.
VCs typically target small pre-revenue startups looking for finance and provide them with resources to grow quickly.
They’ll invest in companies, even those that don’t have impressive financials, since their focus is on the potential demonstrated by their ideas and concepts.
In addition to funding, VCs offer assistance with industry-specific expertise, building fixed assets, and creating infrastructure.
On the flip side, private equity is short-term, and venture capital investors intend for the startup to have accelerated growth so they can pull out within four to six years.
At the same time, entrepreneurs can also look to VCs for post-seed funding rounds.
Angel investors are affluent people looking for investment opportunities. Such investors usually have extensive experience with startups and likely to invest in more than just finance.
Entrepreneurs can also expect hands-on, sector-centric expertise if they can connect with people who have previously built and exited companies in the same industry.
Angel investors can offer know-how and the opportunity to approach other people in their network for funding.
Although most angels are individuals, they may invest as groups also, and investments typically start at $50,000 to $ 1 million.
Crowdfunding is a great source of finance for entrepreneurs who lack the assets to offer as collateral for bank loans.
Further, if the startup is a risky venture, signing up with a crowdfunding site might just be the perfect option. This finance is available from a large group of small investors via an online platform.
Any person with a viable business idea and looking for funding can choose from any of the three categories, such as loans, convertible loans, and pre-orders or donations.
Crowdfunding loans are suitable for ventures with a high-risk profile. But, startups with a working product prototype can attract pre-orders or donations to fund the production of the first batch for sale.
Startup incubators are organizations formed for the sole purpose of assisting budding entrepreneurs in establishing their startups.
Such entities can be non-profit public or private agencies, a team of expert professionals, or a platform.
In addition to funding, these incubators provide office space for working, possibly, at a co-working hub, mentoring, and guidance that can prove invaluable to a new startup.
Incubators typically target young entrepreneurs who have ideated brilliant concepts but need help converting the idea into a commercially-viable enterprise.
Most importantly, they train young people to build pitch decks for future funding rounds.
Future Revenue-based Loans
Entrepreneurs who are confident that their business idea has the potential to earn assured revenues once production starts can consider getting revenue-based funding.
These loans are given on terms and conditions that the investor will receive a fixed percentage of between 2% and 5% of the future revenues the startup will make.
Startup owners pay interest payments that are limited to a maximum of two to three times the initial funding amount.
Suitable for pre-seed startups, revenue-based loans ensure owners do not dilute their equity shares.
Family and Friends Funding
Reaching out to family members and friends for loans for a new startup is one of the most accessible options of funding entrepreneurs can rely on.
Also, ideal for pre-seed businesses, this form of funding is accepted in exchange for small equity shares.
Investors may not know how loans or business ideas work, but they are open to offering money to back their relationship with the startup owner.
Regardless, it is always advisable to draw up the necessary agreements and repay the loan with or without interest. Aside from friends and family, former colleagues or contacts made through networking can also be approached for funding.
Before searching for good, low-cost sources of finance, a great first step is to engage the assistance of an expert fundraising consultant.
The right professionals can help with creating compelling pitch decks and connecting with the right investors who might be interested in investing in the startup. They also facilitate ongoing and future funding efforts.
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