All successful enterprises started with the germ of an idea, and just an acorn grows into a huge Oak tree, your idea can develop into a vibrant business, but you need capital to kick start it. Finding the best source of funding for your startup idea can be a challenge, but if you do your research and scrutinise potential sources, you will do yourself a favour down the track. The decision you make now about your source of capital is the linchpin to your future success, so you need to be aware of the pitfalls and choose investors wisely.
Bootstrap Funding
‘Bootstrapping’ - pulling yourself up by your bootstraps is an old saying - means cobbling together your personal funds, including raiding your savings account, credit card, lines of credit on your home loan, borrowing on any equity in your home or even crowdfunding. Sourcing funds this way is a good approach to funding your startup, and many successful business owners do it until they’re making a profit. Bootstrapping means you won’t have to service a large business loan, but if you want to grow your business fast, you will probably have to bring in other sources of capital.
2. Friends and Family
It’s hard to ask friends for money and just as challenging to approach members of your family, but these can be trusted sources of capital for your startup. Moreover, remember, the worse they can do is say no. Also, if you get a small amount from each of them, it could add up to something substantial to start the engine. However, it’s a good idea to have your business plan well and truly down pat before you ask friends and family for a loan. If they can see you’re serious and know what you’re doing, they might be just as excited as you and take a real interest in your success. Be clear on what you want from them, a loan, an investment, a gift? They’ll need to know what you’ll be selling, how much you will make and when they should expect anything back from their investment.
3. Try an Accelerator or Incubator
If you need more support for your fledgeling startup you could try an accelerator to get thing moving ahead. Accelerators take on a group of startups for a certain amount of time and funding support. Don’t confuse Accelerators with Incubators which are usually defined by workspaces shared with startups. Accelerator programs can provide a founding team mentorships, cash, and networks that can fast-track growth and learning. They can offer startup teams less than A$100,000, and some, though not all Accelerators take an ownership interest in the startup in exchange for the funds. Also using an Accelerator means you can mingle with like-minded people and if you have a problem there’s someone who can sort it out with you. Incubators offer more than just money (up to $20,000) providing startups with mentorship and guidance worth so much more than that.
4. Preferred Stock
When they raise money, startups commonly offer preferred shares that often come with provisions such as liquidation preferences and rights. Preferred stock can be ‘callable’ which means the business can buy back shares from shareholders for any reason and at any time and usually at a good price. Preferred stock shareholders get their dividends before common stockholders get theirs, and the amounts are usually higher. Preferred shares are senior to the common stock, and this makes the investment more desirable and gives investors confidence that they’ll get paid out first. It’s only fair since these investors were the first ones to help the startup to be successful.
5. Venture Funds
Venture funds pool investments from a limited amount of cohorts and then manage them by investing in founders that are in line with the aspirations of the fund. If you want to raise money from a venture fund, you’ll need some measurable success and a working prototype of your enterprise. The size of the funds invested is usually a lot higher than the sums provided by angel investments and could reach $1million or more. Therefore, the venture capitalist will want a seat on the board to wield some control over their investment. If you go down the path of venture funding, be aware that venture capitalists will only offer funds to around one or two percent of the applications they view. You’ll need to prepare yourself for lots of pitching.
6. Business Loans
Once you can prove you’re getting ahead and that a bank loan would spur things on even more you might be eligible for a traditional business loan from a bank. Although with the Royal Commission into the banking industry scrutinising lending to small enterprises in Australia, small businesses look like facing more obstacles in getting credit from the banks. Some marginal applicants could find it harder to secure a business loan with banks becoming more conservative in their business lending practices. You might have to provide a lot more paperwork, but small business experts believe the banks need not retreat from business lending because small business is still lucrative for them.
7. Angel Investors
Angel investors are individuals who fund startups from $50,000 to $100,000, and often combine the money with various other sources into what is known as an ‘early seed round’. There are angel organisations that connect member investors with early-stage startups with formation capital. However, if you’re a startup, it’s a good idea to be careful, especially with angel investors because a deal that looks good can often come with some fine print. Some angel investors feel that since they’ve provided their, say, $50,000, they should wield lots of control over how you run the business. Such funding can cost you more investment down the track because some angels provide funds on the provision that you won’t allow future investors to take part.
Author’s Bio
Alex Morrison has worked with a range of businesses giving him an in depth understanding of many different industries including home improvement, financial support and health care. He has used his knowledge and experience to work for clients as diverse as Simple Biz, Cosh Living and Me Bank to help them reach their business goals.