Funding is an important stepping stone for any startup. And the lack of funding is the second highest reason behind the failure of startups. Capital is the backbone to keep any startup running. Hence pops the question-How do I finance my startup and what are the ways to go about it.
Here are the 8 Ways To Fund Your Startup
Bootstrapping a.k.a Self Funding
This is one of the easiest ways to obtain funding, well because, you are funding yourself or borrowing money from friends and family with or without interest. This removes the hassle of having to explain your whole plan to prospective investors and hoping that they will believe in your idea as much as you do to invest in it. This is ideal for first-timers because you have no track record of success or experience, two things that are important to investors.
So, if it is your first time, it is better to save some amount first before jumping into the startup pool full time. Startups will definitely not pay the salary you are used to at the start. Rather, you have to pay to keep it afloat.
Also, self-funding is advantageous in the fact that you have full control and ownership of your startup. You need not sell equity in exchange for money in case of other funding methods.
Loans From The Bank
We generally think of banks when we need money. Banks can give you a suitable loan necessary to either keep your startup afloat or scale-up. But banks usually have a certain strict criterion they need you to meet before deeming you eligible for the loan. And their rates of interest are also not very borrower-friendly, especially for large amounts.
On the bright side, you will have full ownership of your startup. You don’t have to explain your plan to the bank and make them believe in the idea. All you need to do is put up collateral and see if you meet the criteria for eligibility. Only go for this method of funding if you are confident you can pay the money back with interest.
The government has several schemes in place for startup funding, especially if it is for a social cause, like rural healthcare, fighting crimes against women, dealing with water crises, etc.
The Micro, Small and Medium enterprise act of 2006 “facilitates the promotion, development and also enhances the competitiveness of micro, small and medium enterprises and for matters connected therewith and incidental thereto”
Registering under the MSME act will make your startup eligible to benefits depending on whether it is a product or service and startup costs involved.
There are multiple schemes in place for different kinds of products and do your research to find the one most suited for you. The government has long since recognized the power of the startup ecosystem in a budding economy and is eager to help it flourish.
This is a recently popular method to get funding for your startup. Here, you don’t have just one, but multiple investors for your startup. All you have to do is choose a crowdfunding platform, and explain your business to the audience. You don’t have to explain the technical know-how of the product/service, just what the product/service is for, how it works, and why you need the money.
You also have to offer something in return. That can be anything- from exclusive product launch invites to limited edition version of the products or if necessary, equity. That is completely up to you and it should also satisfy your investor.
Getting crowdfunding for startups is also a great way to get a reality check. It will tell you whether your product has an audience. You will also get customer feedback. This is a chance for you to get in touch with your audience and slowly generate a customer base by keeping them engaged and making them feel as if they are a part of your journey. It is a great way to get loyal customers.
Angel investors are people or a group with surplus cash and looking to invest funds in startups. They are also quite willing to take risks if they feel your startup is worth it.
They expect the equity in return. So, think twice before seeking angel investors because they might want to assume more of a management role than you might be comfortable with.
Angel investors offer valuable mentorship because they have invested money in you and would like to see you succeed. Look for investors who have experience in the same domain your startup comes under. Network well and have a few options in hand before you seek out an investor or angel investing group. Be prepared to face rejection along the way.
This is the go-to method for people experienced in the startup domain. Venture capitals are like the benevolent godmothers for any startup. Venture capitalists provide you guidance, constantly evaluate your startup in terms of scalability and profitability to guide you on how to proceed so that they can get maximum returns because they hold equity.
Which brings us to the same question with angel investors- how much control are you ready to relinquish? Because here the stakes are higher. And the investors will be on the lookout for returns as soon as possible. That rules out expecting any loyalty towards you. The startup ecosystem is as exciting as it is cutthroat. And the investors’ only aim is to get returns for their investment.
Landing venture capital in the first place is no easy task. You should exhibit a good business plan already in the works, backed by an excellent team. You must prove your worth to invoke their interest.
Funding From Incubators And Accelerators
Incubators and accelerators are platforms that help startups to kick-off.
Incubator programs are available in almost all major cities. Startup incubator provide much-needed guidance, network, and contacts. Even office space, if necessary. Simply put, they take you under their wing until you develop your own. They are run like a camp and take from anywhere close to four to eight months. Patience is key.
Accelerators on the other hand jumpstart your vehicle. The difference between incubators and accelerators is the time frame. The former is a drawn-out process, while the latter can comparatively take a very short time.
AngelPrime, Seedfarm, Khosla labs are few examples of incubators.
There are numerous contests with large amounts of reward money for the explicit purpose of helping the startup culture flourish. These contests typically require a presentation of your business plan or a working prototype and that depends on the competition.
These contests provide a platform for you to convince the audience of your idea. Since they also involve a certain amount of prize money and fame, they are great motivators to make you want to do your best.
Microsoft BizSparks, Let’s Ignite and NextBigIdea are a few of the popular contests conducted.
Funding is for sure a painstaking task, that you have to achieve no matter what because your startup relies on it. No pressure. If your idea is good and you have the brains or you have hired the brains to make it work, somebody will surely be ready to invest in it. Research and prepare well before you start the process, and don’t expect immediate results. Every rejection is a lesson on what not to do for the next time.