Starting a business can be overwhelming. There are a lot of challenges to overcome before you can get the startup off the ground and onto the market.
To make your big idea work, you will need a loyal team of professionals around you. A strategy for the first year of business, and another for the next five years. An office. A business account. Wi-Fi. But to tie it all together and turn your idea into reality, you will need to find the funding for your startup. And this is THE challenge.
Despite the fact that now there are a lot more funding options for new business ventures than before, finding the funds to start a business remains a grievous task. It requires dedication and a lot of effort to review all the options and tap into the best financial stream. But with a little luck and these fundraising tips, you will be able to secure funding for your startup and keep it afloat until it gains some momentum.
Determine how much capital to raise
A startup needs $10,000 of capital on average according to the Wells Fargo Small Business Index. But another report from the Kauffman Firm suggests the figure is closer to $80,000. Either way, that’s a lot of money.
Keep in mind that the amount of capital you need is specific to you, your business and the industry you want to enter. For example, an e-commerce retail store needs far less funding to set up operations than a manufacturing business. So, how to determine the right amount for your startup?
Conduct a full-scale market research to assess your industry and create a financial plan. One of the main features of a good financial plan is a financial forecast. This will project how much you need to spend to run day-to-day operations to generate cash flow.
To do it, estimate your overhead costs, things like office rent, utilities, employee salaries, and monthly resource purchases, and add it to your one-time expenses, for example, purchasing office supplies and equipment. If you do it correctly, a good financial plan will not only allow you to know how much capital you need, but it will also provide reassurance to investors and loan institutions to fund your business.
Explore your options
After you have a goal and know how much capital you need to raise, it’s time to find sources of funding. And there are a few options available to you:
This means you fund your startup using personal capital without an outside source. The biggest benefit is that you remain independent in how you organize and run your business. The negative aspect is that all the liability rests solely on you. But, in fact, 82% of entrepreneurs fund startups by bootstrapping, including funding the business via your current job, accessing your savings, using credit cards or raising capital from existing assets, such as taking out personal loans or mortgaging your house.
2. Family, friends, and fools
This is the first external source of funding you need to look at. Known in economics as family, friends and fools, it means accessing your own network of personal connections to secure funding for your startup. You can ask family members, colleagues, partners, friends and other people in your life who are willing to support your business financially. Keep in mind, though, that you should separate professional from personal, so a contract might be useful in this situation.
Government grants provide you with free funding to start your business. This largely depends on the industry you want to enter and the type of product or service you intend to offer. Often, grants are handed out to businesses that have an important social cause, such as innovative technology, education, and medicine.
4. Bank loans
Here’s where your business and financial plans come into play. Banks approve small business loans for entrepreneurs with solid revenue projections – if a bank is satisfied and confident that you will pay back the loan with interest until the agreed deadline. But even with the best financial plan, banks are generally reluctant to approve small business loans, and you normally have to provide a personal guarantee that makes you responsible for paying off the loan.
5. Angel investors
Angel investors are individuals with capital who invest in startup ideas they deem potentially valuable and lucrative. In exchange for the initial funding they provide you, they expect a share of the company. However, angel investors usually also want to see a good business plan in action before they commit to an investment. For example, SaaS companies would need to provide a live demo, while hardware developers a prototype of the device.
Crowdfunding platforms like Kickstarter and Indiegogo enable startup entrepreneurs to raise capital by campaigning to everyone and allowing people to invest as little as $5-10. There are two types of crowdfunding: equity crowdfunding, where people get company shares in return for their investment, and reward-based crowdfunding, where people receive rewards, like gifts, merchandise or pre-release products. Crowdfunding is a cost-effective way of raising funds, but it can be time-consuming depending on the success of your campaign.
When thinking about creating a startup, it’s important to think about how to overcome funding challenges. So, think ahead and make it an initial focus when developing your business strategy, and dedicate at least 50% of your time to that end. Once you secure the funds and your business gets rolling, the investment you made in fundraising will certainly pay off.
Keith is a business consultant with experience in numerous small businesses and startups. A regular contributor at Bizzmarkblog.com, he enjoys giving advice on both traditional and digital marketing campaigns.