The business sector is constantly evolving and the recent explosion of new startups (encouraged by the COVID-19 pandemic) is a wonderful way of proving the market’s flexibility and strength.
Plus, there are new segments that gather both talented specialists and investors, such as Artificial Intelligence and Machine Learning. For instance, the AI field managed to gather around $8.2 billion in funding in 2020!
And yet, there aren’t many fields with this level of attractiveness. If your startup operates in the food industry or in delivery and logistics (another segment on the rise, by the way) you won’t have investors throwing their money at your business. This means that you will have to look for various funding solutions.
Luckily, in today’s economic environment, there is enough diversity so any startup can design a reliable and viable funding strategy that doesn’t include a bank. Still, it’s best to choose low-risk solutions, which is why we are going to go through the top three most common funding solutions for startups.
1. Revenue-Based Financing (RBF)
This funding solution is great because the startup using it doesn’t have to give up ownership of any part of the business. Also, your payments vary according to your monthly revenue. This means you are not locked in a fixed-payment solution where a couple of bad months can create a lot of financial pressure.
So, what is revenue-based financing? The concept can be a bit difficult to understand and it’s best to research the system beforehand. But, in a nutshell, with RBF, the investor or financing firm provides capital in return for payments based on the startup’s incoming sales revenue.
Plus, the conditions for being accepted are more flexible and take into consideration your business’s capacity of creating consistent recurring sales over a specific period of time.
Also, as long as your revenue stays within specific guardrails, the investor won’t stop the funding. This makes RBF a good option for companies that don’t have many assets or a good credit score (such as new startups).
2. Venture Capitalists (VCs)
If you don’t mind surrendering part of your business in exchange for capital, then Venture Capitalists are a viable funding option. However, you have to prove that your startup has high growth potential. Also, it helps if you have some sort of competitive ace up your sleeve (like a patent in an up-and-coming field).
VCs are extremely interested in investing in startups that work with new technologies (remember the AI field we mentioned earlier?) and promise high levels of growth in the not-so-distant future.
But there’s more to a VC than just the capital. A startup also needs industry connections and access to experts and knowledge that only a well-connected person or entity can provide.
Plus, you may have the know-how when it comes to creating edgy tech products or services, but growing a business is a whole different thing. In this case, the guidance from an experienced investor or group of investors is extremely valuable.
Crowdfunding gives you an alternative funding solution without venture capitalists or financial organizations. Instead, you get several individual investors who are willing to put their money into your idea.
In most cases, these investors are regular people looking for projects to support. However, crowdfunding platforms are also browsed by big investors who may approach you with a different solution if they like the idea.
Overall, crowdfunding is a great solution to raise the seed money needed to get the business going (your proof of concept, if you will). Moving forward, you will have to decide if you would rather go to investors or you would go to a bank or a similar funding solution.
Most startups need some sort of financial support at different life stages, which is why it pays to know your options. Also, it’s a good idea to research ways to boost productivity in order to make sure your business is running at 100% capacity and producing at its full potential.