New businesses are established every day and entrepreneurs are also always looking for funding options they can actually consider for that new business. Most people who start businesses are passionate about their ideas and are committed to see it succeed, but convincing an investor to go with you on that road can take lots of time and numerous investor pitches. The requirements from friends and family are different from a bank or an an angel investor but you need to think through the business and its growth strategy before approaching investors. Some matured entrepreneurs have even considered lifetime mortgage in times of desperation to start a business at all cost.
Personal Funds and Savings
Most entrepreneurs start off with their own personal savings to kick start their new businesses. This option allows you to put your idea to test to find out if there is a real need for your business or idea. A business at the idea stage is less likely to find an investor hence the need to start it with your own funds and bring along an investor when need be. The only disadvantage is that you could loose all that money without actually getting the business off the ground as you expect. But the advantage with this option if that you can actually try out that idea you are so passionate about knowledge that you with the knowledge that you don’t owe anyone. Even if you fail, you know you gave it your shot. But be careful how much you put in an idea with little or no research about its relevance to the target market.
Family and Friends
Convincing family and friends to invest in you is not that simple. Most friends and family members will only invest on your business because they care about you and want to help you. Notwithstanding the idea, you could get funds from family and friends to start the business and pay them out later when the business is successful. Of course you enjoy the benefit of a soft loan without interest. Most businesses that gets funded by friends and family risk loosing great relationships when the business fails. Be careful who you take money from to fund your business.
Angel investors have proven to be a great alternative for entrepreneurs seeking funds. An angel investor or angel (also known as a business angel or informal investor) is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. Because a large percentage of angel investments are lost completely when early stage companies fail, professional angel investors seek investments that have the potential to return at least 10 or more times their original investment within 5 years. Angel Investor fills the gap in start-up financing between “friends and family”.
Startup incubators are great options for your startup because they not get you the money, but they bring along their experience, partners, network, mentors and a great community you can rely on for support and assistance. Popular startup incubators like Y Combinator, 500 Startups, Techstars and Seedcamp have graduated hundreds of profitable startups. Most accelerators invest money in exchange for equity usually not more than 10%.
Most venture capitalists will only invest in your business when you have a working prototype, initial customers or have proven track record that your startup is promising. Venture capital (VC) is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The typical venture capital investment occurs after the seed funding round as growth funding round. Venture capital is attractive for startups with limited operating history that are too small to raise capital in the public markets and have not reached the point where they are able to secure a bank loan or complete a debt offering.
The options listed above are popular with startups and they actually work. Other popular ones worth mentioning are crowdfunding, awards/competitions and donations via social media to gather funds.