For any startup to be successful, a good business plan is the most important element. However access to finance is such an hurdle that makes any founder perturbed; especially when their business idea is rock solid with tremendous growth potential.
However, digital transformation has made this unnerving task simpler for entrepreneurs. This is because there are now plethora of financing options available for honest and hardworking entrepreneurs with an excellent business idea e.g. the ones that solve problems of larger section of society. The capital procured can then be used by the owners to scale up their venture and give it a fillip.
Crowdfunding, business angel, venture capitalists, incubators, accelerators and others are several new modes of financing which gives entrepreneurs an initial boost to launch and grow their startup successfully. Although each financing options for startups are legit and valid, not all of these will be applicable to every business.
This article provides information on various features of each financing option which will help anyone looking to fund their startup.
New Age Financing Options for Startups
(1) Business Incubators:
Business incubator is a program that gives the necessary support to businesses in their initial stages in order to develop, strengthen, and grow.
Incubators offer consulting from the initial phase of the project i.e. from the moment the business idea is developed. However, their role is much more. They can also offer a physical space, which includes basic services such as water, electricity, telephone and Internet, in addition to legal, financial and accounting guidance, etc. And in some cases encourage contact with potential investors.
The main objectives of an incubator are:
- To support the emergence of new potential businesses
- Minimize the risk of failure
- And ensure the success of innovative projects; and partner with their growth.
(2) Accelerators:
Startup accelerators have many commonalities with business incubators. Both have same objective i.e. development and growth of businesses with innovative ideas and helping them to reduce business failure rates and guidance. However an accelerator is committed to support ventures that are already in the evolving stage but with an objective of rapid growth. They also have greater possibilities for external investment and accompany a business for a short time frame.
(3) Business Angels or Angel Investors
The ‘business angels’ are individuals with ample capital and know-how of the business they are investing in. These angels are in constant search of lucrative and promising businesses where they also play an active role i.e. contributing their knowledge, experience and contacts for the generation of a medium-term return.
Hence as the name says business angels are really the angels for the start-ups because they are wealthy, entrepreneurially experienced private investor. And besides capital; they also bring in entrepreneur know-how and network contacts into young, growth-strong enterprises.
Business angels usually invest a minority share in the start-up phase of a young company or in the first years after its foundation (seed phase, start-up phase).
Except in emergencies, they themselves do not get involved in the operation of the business. They invest in young enterprises with the goal of creating the so-called exit in some years, i.e. to sell the participation or the whole enterprise profitably.
(4) Venture Capitalists:
This is the favorite among start-ups. Venture capitalists (VCs), provide medium-term capital to companies that are struggling in accessing other sources of funding either to sustain growth or for research, development and innovation.
By utilizing VC money, the company can carry out the dynamic and meticulous actions to sprout and amplify its value. And once the investment has matured, the capitalist exit with a profit. From a VC’s perspective; it’s a very risky investment. Because when the business fails, the capitalist loses the money contributed. However, investments are typically made in new or existing companies with above-average growth potential and high potential for market expansion.
Funding from venture capital means that your business has, in the eyes of the venture capitalists, at least considerable potential for rapid and profitable growth, so your company’s reputation is ought to increase.
(5) Crowdfunding
Crowdfunding, is another promising methods of financing. It is also known as reward-based crowdfunding. Through crowdfunding, the entrepreneur requests financing from anyone who may be interested in his/her business idea and in return they receive a non-monetary “thank you”. This can be the finished product or can also be ticket for an event, gift vouchers, etc.
This type of funding allows access to financial resources without mediating with banks.
(6) Crowdlending
Crowdlending is a peer-to-business lending model. It connects companies seeking capital with investors looking for business model to invest in. And in return; startup has to offer higher profitability or higher interest rates to investors.
Internet platforms arrange loans to the self-employed or for private purposes. The lenders receive fixed monthly interest and repayment instalments for a fixed term – regardless of whether the company is profitable or at loss. Its application means substantial savings in financial costs for companies and a higher return for investors. This is the reason why it is one of the most sought financing route for a start-up.
It is an innovative model because it does not involve financial institutions but its capital is raised through a community of capital lenders. These loans are usually small amounts for the lenders but the collective sum becomes a large amount for the borrower.
However one of the biggest fears of the lenders is of course the risk of default. But as it diversifies into a greater and lesser amount of loans; the risk reduces significantly.
(7) Crowd Investing
Crowd investing involves investors and/or small investors in start-ups. In return, they expect a share of the profits or company value. The investors have information rights but no decision making power in the operations of the business; which is completely different than investment made by business angels or venture capitalists.
(8) Bootstrapping
Bootstrapping is a way of internally financing a new company that uses the profits from its own investments or those of its founders to establish a company. The business is operated without external financial support. By eliminating outside influences from investors, bootstrappers can concentrate entirely on expanding the business, building relationships with customers and suppliers.
