You could have a great startup business plan enhanced by an excellent marketing strategy, but that plan could fail without considering financial options that range from accelerators to venture capitalists to a host of other investors who have the capacity to fund your project under the right conditions. What makes your plan a good match for investors? What makes sense for your needs?
When entrepreneurs bootstrap, they finance their project with personal funds that generally come from savings and credit cards and money borrowed from friends and relatives. Even if the product fails to produce significant monies, the entrepreneurs have paved the way for securing funding from other investors because they have already completed some phases of their business plan.
Some companies that start with bootstrapping will determine that their organization needs more funds to continue. But what are the benefits of bootstrapping? These companies are somewhat established and have credibility. This makes them attractive to investors. Less risk is involved because your financial plan predicted these potential outcomes. Bootstrapping can lead to traditional funding from a bank.
Crowdfunding platforms include Kickstarter, Patreon, GoFundMe, and Crowdcube. The world-wide-web gives entrepreneurs access to millions of investors who could be interested in an organization for varied motivations. There are four basic types of crowdfunding: (1) donation-based funding; (2) equity funding; (3) debt-based funding; (4) reward-based funding.
First, donation-based funding allows an organization to receive money from a large group people. There is no promise to repay or relinquish ownership. Second, equity funding requires the organization to give investors equity in the company. Third, debt-based funding requires a company to pay back debt with interest. Fourth, rewards-based donors have no expectation to be repaid. They want to receive products offered by the company.
The main advantage of crowdfunding stems from the fact that business owners aren’t contractually obligated to make a monthly loan payment. On the down side, entrepreneurs who choose crowdfunding usually relinquish equity in their company. Nonetheless, business owners could opt to use crowdfunding instead of securing monies from a bank in order to alleviate concerns about defaulting on a loan.
Banks analyze your credit history to determine the risk of loaning money. Other financial sources do not require a background analysis. Banks offer secured and unsecured loans. The latter gives banks access to your assets if you default on the loan. Loan repayment requires monthly payments until the loan is paid in full while crowdfunding campaigns generally do not require the owner to repay funds by a given date.
The Benefits of Grants
Grants are another type of financing. These monies are awarded by governments, foundations, or companies. These organizations provide monies – called gifts - that don’t require repayment. Grant money can be used for hiring new employees, investing in marketing, purchasing inventory, ongoing product development, and upgrading facilities.
Grants provide funding - at various dollar amounts - for numerous purposes including a Fresh Start Business Grant worth $2,500 to cover startup costs. The Minority Business Development Age Centers (MBDA) help minorities access capital, secure contracts, and compete in emerging markets. The MBDA oversees a national network of business centers committed to growing and promoting minority-owned small businesses.
Entrepreneurs can secure startup money through venture capitalist. These investors are private equity firms that invest in startups, early stage companies, and expanding companies. They look for companies that have the potential for high growth. Once the startup has demonstrated success, the venture capitalist will either sell their sell share in the company or recuperate their money through an initial public offering. They’re generally looking for a 25% ROI.
Venture capitalists provide a viable means for startups to secure funding that has several advantages. They provide invaluable guidance and expertise. They don’t require business owners to repay monies. If the company needs money quickly, venture capitalists might not be a good fit. They are generally slow to release funds. Another drawback focuses on the reduction of ownership.
Accelerator Programs and Mentorship
Entrepreneurs can also find assistance by tapping into an accelerator program that provides guidance, support and funding in exchange for equity. One example of the effectiveness of an accelerator program can be demonstrated by the success of wind turbines. There was a market gap presented to mentors of an accelerator program, and they accepted the proposal of the entrepreneurs.
Entrepreneurs identified the volatility of oil and gas prices leading to the feasibility of renewable energy sources. Essentially, accelerator programs provide startups and early stage companies with the tactics and strategies to scale up rapidly. The funding from these programs ranges from $10,000 to $120,000 or more.
One drawback to accelerator programs is their exclusiveness. Only 1% to 3% of all applicants qualify for a program. The most prominent drawback to accelerator programs is that they require a significant time commitment from the entrepreneur. Programs usually have a duration of three months to one year. Accelerator programs often require the entrepreneur to work full-time when building their business.