The Starting Point of Funding Your Business

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Funding
Not everyone has the funds to start their entrepreneurial ideas.

They say creating solid ideas for a business is the hardest part for an entrepreneur. Others have the opposite problem. Many budding entrepreneurs cannot materialize their ideas because they lack funding. Banks are getting more stringent than ever when it comes to loans. The economy remains pretty stagnant and subsidies granted by the government are harder to obtain these days. You may think the future is bleak for the birth of new ideas, but, as they say, we tend to be more creative when we are in a pinch.

Fortunately, there are alternative ways to fund your startup business. Entrepreneurial success helped by online campaigns is getting a more reasonable buzz nowadays. This year, about $23.4 billion were given in Asia to fund startup businesses. Wear your best suit, your best business plan and prepare your prototype, because your product might be the next big thing, once you know the channels to get your funds through.

Crowdfunding

Examples: Kickstarter, Indiegogo

The easy access to information on the internet popularized crowdfunding. For the entrepreneur, putting up an account on Kickstarter or Indiegogo is the easiest way to gather funds. He just needs to write a detailed description of the product and some of its sample photos or videos, and also include his goals for starting the business and his funding goals. The entrepreneur can customize the layout of his crowdfunding web page to entice more visitors.  Anyone can contribute or pledge a certain amount of money to fund mass production, as long as they like the premise. In exchange, the entrepreneur gives something to the pledgers, depending on the amount the individuals contributed.  By the time of release, these special offers can range from free updates to free products.

Some websites only give the money when you reach the funding goal. Others are laxed, as they give the funding to the entrepreneur whether the goal was reached or not. The website usually takes a percentage of the funding before it is remitted to the entrepreneur. Not only is crowdfunding accessible, but it is also an affordable way to start-up your business.

Kickstarter and Indiegogo are currently the most popular crowdfunding platforms. Gathering start-up funds using these websites is also quite trendy, because of the ease of access, plus it can be done almost for free. However, be reminded that many projects remain unfunded for years, as this is also the most competitive channel. Before you dive into crowdfunding, make sure you have a solid business model that can persuade strangers to fund your project. In addition, people would love to hear your inspiration in creating this product, so make sure you create a compelling and convincing one.

Venture Capitalists

Examples: 3i, Advanced Technology Ventures, Andreessen Horowitz

Even the most successful crowdfundings can only pool a few million dollars. If you need larger capitalization, venture capitalists can back up your business. These are firms which specialized in looking for persons who are struggling with their startups and helping them. This manner of funding is responsible for creating about 600-800 companies in the United States alone. The popularity of Venture capitalization is on the rise worldwide.

Venture capitalists help businesses which are past the starting point, but need additional funds to meet their growing demands and to expand their business. Stream of cash flows usually comes in stages, with the largest streams during the seeding phase. They normally focus on specific industries, but some venture capitalists are interested in firms which have unorthodox (yet potentially profitable) ideas. Advice and mentoring are given to budding entrepreneurs, to help their product grow on the market. In exchange, Venture capitalists claim ownership equity. They eventually earn by selling these claims through initial public offers or through merger or consolidation.

However, venture capitalists lack company loyalty. It is totally possible for them to fund your rival firm at the same time they fund yours. You are also advised to protect vital and confidential information about your business. Their methods are quite understandable, because they need to recoup the cost of their investment in three to five years. They also only take interest in businesses that promise bigger opportunity and are more stable. High growth firms are prioritized, since these promise more earnings. Of course, venture capitalists will also take control of your business to some extent. Some are even hands-on with your daily operations. This might not be your cup of tea, especially if you are not hot with adjusting to other’s demands.

Angel Investors

Example: Accredited Investors listed in United States’ Securities and Exchange Commission

Angel investors are persons who are rich enough to finance a startup business. They are mostly retired entrepreneurs or executives wanting to help other entrepreneurs, mostly in the form of philanthropy. Some are also interested in teaching the younger generations how to make their ventures successful. Also, they want to keep abreast with the business environment. They also form groups to pool larger funds and lend them to an entrepreneur. They are similar with venture capitalists, yet they work in smaller groups and operations. In US, some angel investors are registered in Securities and Exchange Commission (SEC) as accredited investors, to comply with the law.

Angel investors normally take a significant interest in your startup firm, and are expecting a 20 to 25% internal rate of return. This is done by taking ownership in the form of stocks or convertible debt. The relatively high requirement is due to the risky nature of angel investing. They lose the funds when a startup business fails, so they have to cover for that loss.

Google and other gargantuan firms started with the help of angel investors. Those which are financed eventually by venture capitalists are first helped by angel investors. In terms of the number of firms being helped, angel investors account for about 60,000 startups in United States alone. The atmosphere they create is also far lighter than that of venture capitalists. Hence, it’s easy to see this as a springboard for more ambitious entrepreneurs. Nonetheless, take note that you cannot raise funds as large as you might have from venture capitalists. This is because angel investors provide money from their personal accounts, in contrast to the others which have a pool of professionally managed funds. As a result, they are thorough in appraising your company’s worth. It takes months before you get some capitalization and you really have to answer their concerns. Yet, angel investors are worth taking a shot, because they provide benefits beyond monetary as they lay out their previous experiences.

Preselling your Product

Doing this won’t hurt the chances of your product’s success, because presales are mostly ignored. If not, it will be a positive hype that will increase the participation at your formal release date. Presales are also referred to as soft launch, where you release your product to a limited market before launching it publicly. In addition to gathering funds, you can gather customer feedback in order to determine their reception of your product. These pieces of information are also useful for doing final improvements to your product before your grand release. Your method of launching presales depends on the one you will release.

Rest assured that little to no marketing costs are incurred with this method of funding. Beta versions of your favorite games were played by other users beforehand. Operating systems of smartphones were also given early software updates. Of course, bugs will appear, but buyers are more receptive. They are beta-testing your product, after all. Even Gmail was released through soft launch, without much disturbance to Google’s normal operations. If what you are offering is a tangible product, soft opening is done to entice a considerable number of customers.

Please note that you should do some forecasting before launching a presale. You still do not know the ropes of your supply chain management, and these might cause delays. If the demand is deemed too low it might result in shortage, but oversupply may cause your inventory to build up. Moreover, the improvements you made in your product might not be well received, after all, in your grand release.

Winning Contests

Example: grants.gov, your local government agency, Innovation Contests

Sometimes, all you need is a detailed business plan to gather fundings in your startup. Mostly thanks to nonprofit organizations and government agencies, which regularly hold competitions and provide capitalization to the winning plan. Moreover, your paper will be scrutinized and be improved by experts in your line of business. This saves time and cost in delving with inefficient activities in the execution of your business plan. Downtown Yoga won $ 15,000 after winning the Hartford Innovation Challenge. Garrett Gee’s world-famous Scan was originally an entry in an intra-university contest, then, later, his group met several venture capitalists. These contests can only fund a certain amount, which is smaller than that of angel investors. Your chances of winning will also be tough, as hundreds of other business proposals are entering these competitions yearly. You may want to attend trade shows, as thousands of would-be investors are present there. You should be able to create a working prototype by that time, though. Nonetheless, these are great avenues to get your product noticed.

You may also seek a government agency for the funding of your business. Government grants come in many forms, such as providing technical assistance for free, cash, or interest-free loans. Boston Dynamics used to be funded by DARPA for their experimentations with mobile robots. Normally, science and technology projects are regular recipients of government grants. If you are offering something other than the two, do not lose heart. Prepare your best grant proposal and let the body decide if it’s in line with their core agenda. Ask your local government offices, because they have programs aiming to help small businesses grow. However, the government has very strict rules when it comes with funding projects. They monitor the nature of your spendings and where these went. Once they see violations, they will ask you to return what they gave.

Credit Cards

Example: Inquire in your nearest bank if they have this feature.

If a bank does not approve your loan application for your startup, maybe a cash advance from your credit card might help you gather funds. This allows a cardholder to withdraw cash from an ATM until he reaches his credit limits. Technically, cash advances are the easiest way to gather minimal funds for your startup. Every major bank offers this service and you can use it without going through a tedious process. However, of all the methods we’ve mentioned, the cash advance is the riskiest. You will have full control of the company, in exchange.

What you must keep in mind is that transactions of this nature have larger financing costs than typical bank loans. Cash advances from credit cards are normally charged 3 – 5% compounded daily. You must also take into consideration the lack of grace period. Penalties are known to be hefty, given you are disrupting the normal process in the banking system. This can be a relatively expensive way to gather funds, in the long run.

Other Ways

Self-funding is the most accessible alternative. Sell some personal assets which are deemed more as luxuries than needs. You can have part time jobs, or lease a part of your home, to save money for developing your product. If you want a larger capital for a short period of time, perhaps a home equity loan with your house as the collateral is the easiest way (but also the riskiest). Borrowing from friends and family can also be done, yet settling conflicting interests in the future can be a pain. If you have no other choice but to borrow from them, provide written agreements.

You may also use bootstrapping as a means of self-funding. With this, you build your firm using your existing resources and your income earned to date. This is a low-risk way to manage your business, plus it lets you make decisions without external influences. You will also be able to create operating procedures inside your firm unique to your liking. By the time your company grows, you are infusing funds from earnings, instead of paying off dividends (or loans) to outsiders.

Nonetheless, bootstrapping limits the growth potential of your firm. You will have to resort to external funding at one point in time. Bootstrapping is good until you realize you are missing out market opportunities, which means taking advantage of the operating leverage, because debts are actually making your firm wealthier in the long run.

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