One of the questions that startup founders often ask at the beginning of their journey is how to raise funds for business start-ups. Raising funds for a business startup is a daunting task. You need to demonstrate your idea’s value, market it uniquely, and convince investors.
According to Forbes, nine of the ten startups fail, and most of these startups fail within the first year. However, one of the prominent reasons why these startups fail is the lack of funding.
These statistics underline the importance of funding for businesses, especially startups, in their formative years. So, if you are a startup founder bustling with business ideas that can change the world, this article is for you.
We will discuss how to raise funds for business start-ups, providing you with numerous options to get funding for your business ideas.
How to Raise Funds for Business Start-ups
The problems founders face when raising funds for startups have been going on for a long time. The reasons that an investor would not invest in your business startups may vary and can be more complex than you think. Take time to understand what the investors are looking for.
After you’ve understood what investors need, you can start pitching for funds. The following is a comprehensive list of startup funding options and examples of successful businesses that have utilized them in the past.
#1. Angel Investments
This approach is one of the recently popular ways of sourcing funds for early-stage startups. An angel investor is a person with excess or extra cash interested in providing funding for high-potential startups. This individual usually funds the business in exchange for some stake in it, potentially around 10-20%.
Angel investments do not only come from a single person. Sometimes, angel investors form a network or “syndicate” where they examine your pitch or business ideas and determine if it is worth investing in.
Because most angel investments come in the early stages of the business, it is an excellent way to source startup funds. Also, you get to enjoy mentorship and regular business advice from a high-net-worth individual who has likely been successful in business themselves.
However, there is a downside to this approach. Angel investors provide a lesser amount of money when compared to other external investment options. And seeing as they may require a substantial stake in your business, you may find it challenging to raise funds later on.
The story of Facebook is a classic example of a business with a successful angel investment approach. When Facebook was still at its infant stage in 2004, Peter Thiel led a $500,000 angel investment in the company and, in return, got a 10.2% stake. By 2011, that angel investment was worth $1 billion.
Bootstrapping, also known as self-funding, is the process of using your money to fund your business. This option is usually the first for many entrepreneurs as it can be difficult to attract investors when starting, as we’ll discuss below.
You need to show traction, and some success rate before many investors will be willing to put their funds into your business. But by definition of a startup, you are just starting, and there may be no traction or success to show (yet!). So you are probably left with using personal resources for the business.
Another form of bootstrapping is getting money through loans or gifts from friends and family members. This option is advantageous as it removes the bureaucracy of getting money from investors, and you also get favorable interest rates, if any, from your friends and family.
Another advantage of bootstrapping is that you get tied and committed to the business once you have invested your money. This puts skin in the game and incentive to make the business work, which is very important in the early stages of a business.
An example of a business that has successfully used this approach is Spanx. The famous female fashion brand started with a $5000 savings from its founder Sara Blakely. When she could not get investors to commit to her idea, she used her savings in 1998.
Today, the brand is valued at $1 billion, and she has never had to take a dollar from investors since she started.
Until recently, crowdfunding was not a popular option. However, nowadays, many platforms allow you to get money for your business idea through crowdfunding. Here is how crowdfunding works.
The founder puts a very detailed description and pitch deck of the business idea on a crowdfunding platform. This description would include the goals of the startup, the product or service it seeks to offer, the profit-making process, and the total amount of funds needed to start the business.
Thus, consumers on the platform get to read about the business, and if they like it that much, they provide funds by pre-ordering the service or product or by making pledges and donations to the business.
Benefits of Crowdfunding
Crowdfunding has several benefits, which make it a viable answer to how to raise funds for business start-ups.
- This approach has a low barrier to entry and can help you determine the viability of your idea by getting consumers to put their money where their mouth is. If many people on the crowdfunding platform like your business idea so much that they put their hand in their pocket, there is a big chance that they will buy your product or service and become a big advocates of your business.
- By putting yourself on crowdfunding platforms, you are already marketing your business and getting great exposure which could lead to press coverage and customers.
- Lastly, you get to cut out professional investors and the bottlenecks/restrictions that come with their investments at the early stage of the startup.
Your business description on the crowdfunding platform must be creative, brilliant, and perfect. This is because the platform is very competitive, and many startups also seek funding like you. Thus, your pitch or description must be very good to attract the audience’s interest.
There are types of crowdfunding where you part with equity/stocks in the company. In this case, you get crowdfunded in exchange for stocks and shares in your business. Therefore, you need to be mindful of state and federal security laws while attempting this. Also, it would help if you had a lawyer with relevant experience while doing this.
Finally, you should also note that crowdfunding platforms will charge a fee for providing you with a platform to fund your business. This fee comes either as a processing fee or as a percentage of your company’s total money. Examples of crowdfunding platforms include Kickstarter, Indiegogo, GoFundMe, and Fundly.
An example of a successful startup that used crowdfunding is Oculus Rift. The founder, Palmer Luckey, used the crowdfunding platform Kickstarter in 2012 to raise funds for his business idea. At the end of the crowdfunding campaign, he had raised over 2.4 million dollars through 9500 backers. After some years, Facebook acquired the business for 2 billion dollars.
#4. Win a Pitching Contest
Over the years, there has been a resounding increase in pitching contests for small business owners and startup founders. Successful businesses beat the other contestants to win funding and recognition for their potential.
The format of these competitions varies. While some may require you to have an existing product, others only want a viable business idea. Regardless of the pitching contest mode, you would need a perfect pitch.
A perfect pitch is the most critical factor influencing your ability to win funding through pitching contests. It helps you highlight the goals of your business, the unique solution your product or service provides, and the plans for scaling and sustaining the business.
Most of these contests are free, and the most important advantage is that you may not need to give away some form of equity or stake in your startup if business grants are available. Some examples of pitching contests include Seedstars Summit, Startup World Cup, and Demo Day.
#5. Venture Capital Investments
Venture capital can come into your business at various stages; however, VCs typically want to see some traction to prove that you have a viable offering. Therefore, this option is most handy once you have got through the initial legwork of creating your startup, where your costs may be high to carry on growing.
When venture capitalists invest in your business, they do so in exchange for equity and will likely exit when a bigger company acquires you or during an IPO. But, more than funding, venture capitalists provide mentorship and expert business guidance. They also serve as a way to gauge the possibility of your business becoming successful. Thus, if a venture capitalist is willing to invest in a business, the business has a real chance of excelling.
Venture capital investors consider sustainability and scalability when making their decisions on investments. That’s why typically, traction is an excellent sign for VCs, as if they see a big market with early traction, that ticks the initial boxes of a potential rocketship business. As such, the business would also need a clear exit strategy.
This is one of the reasons why companies such as Uber and Flipkart made it with venture capital investments. These companies had a clear exit strategy allowing them access to millions of dollars in venture capital funds for investing, networking, and growing their companies.
However, for many reasons, venture capital investments are not a good option for all business startups. First, venture capitalists have fund “lifecycles”. Most venture capitals seek to recoup large multiples of their investments within seven to ten years. You may not find venture capital investment suitable if your service or product takes a long time to scale and reach many paying customers.
Also, you may have to give up a certain amount of control or compromise with your business. If you are not comfortable with this, venture capital investments may not be your best option.
For example, Uber raised $1.5 billion in venture capital investments through venture investors such as BlackRock Inc., Fidelity Investments, Google Ventures, and Wellington Management.
If you’d like to learn more about the VC fundraising process, check out 79 possible questions Angel and Venture Capital Investors may ask you before investing in your business.
#6. Business Incubators and Accelerators
This is another approach that works well for early-stage startups. Incubators and Accelerator programs are now popular these days and provide an impressive answer to how to raise funds for business start-ups.
While we have placed the two programs, i.e., Incubators and Accelerators, together because of their huge similarities, it is equally important to state the difference between them.
An incubator program is a nurturing program that helps founders grow their business from idea to reality. The program provides the business with technical support, funding, training, and networking. In lay terms, an incubator program does to a business what a parent does for a child.
On the other hand, an accelerator helps with quickening the growth of an existing business. Usually, this business is still in its early stages. But instead of working with the business idea like an incubator program does, an accelerator program works will typically work with a business that has something to work with. Although in its early stages, the startups on accelerator programs usually need a minimum viable product to qualify or benefit from an accelerator program.
Also, incubators do not necessarily provide funding for startups. While they may recommend your business to investors, you may not get direct funding for your startup from incubator programs. Nonetheless, you may have to part with some stake in the business for the resources provided during the program.
With accelerator programs, you will most likely get funding for your startup and also get to the part with some stake in your startup for the seed funding you are getting. The two programs run for a few months, say 1 to 6 months, and connect startup founders and business owners to mentors, investors, and other startups within the program.
Thus, you would not only get funding from incubator or accelerator programs, but you also get mentorship and networking benefits from the program. Successful startups that have used incubator or accelerator programs to scale their business include Twitch, Coinbase, and Airbnb, which used the YCombinator accelerator program. 500 Startups is another incubator program that produced successful startups such as Udemy and Credit Karma.
#7. Advance Funding from Customers
This funding approach involves collecting money from customers to fund the production of a product or service that is not yet available. As much as this sounds like crowdfunding, it is not, and this is for many reasons.
You need to be a registered company to advance funding from customers. You may use the money gained from advance funding to fund a new business idea, but you need to be registered. Secondly, you do not need a crowdfunding platform for this.
How does Advance funding work?
As a founder, you will identify a need or want in a market that people are willing to pay to solve. Then, you create a solution, mostly at the ideation stage or prototype form, and present it to your customers. With this, you can convince them to make an advance payment upfront while you use the funds provided to manufacture or bring the solution to life, deliver it to your customers and receive your profit.
The solution you are providing should be unique and something not tried before, whether by how it’s built or the delivery of the product. This is because customers would rather pay for a solution they can see than one that is promised.
However, while advance funding is not the same thing as crowdfunding, it comes with all the benefits of crowdfunding. You get to gauge if your customers like the proposed solution and also get to market the solution and raise funding for it simultaneously. Therefore, it is a very creative way of raising funds for business startups.
An example of a successful business that has used this option is Tesla. Between 2014 and 2018, Tesla raised $985 million in advance funding from customers paying in advance or depositing a part payment for their Tesla Model 3 electric car that was not even in production at the time. The total number of customers who paid for the vehicle in advance was around 450,000, and they had to wait two years to get the car delivered.
Another company that has successfully used this approach is Amazon through its Amazon Prime service. The service receives up to 11 billion dollars from customers every year to support its program.
#8. How to Raise Funds for a Business Start-up: Bank Loans
This is the conventional funding option for startups and still functions today. Bank loans still work because the operational principle upon which most banks are established involves loans. This simply means that without loans, banks cannot make money.
Therefore, banks are always open to giving out loans. A key obstacle is that banks are conservative and have stringent criteria businesses must meet before taking a loan. Many business startups at their early stages do not meet these criteria.
With bank loans, you have numerous options, including the small business line of credit, funding and equipment loans, and working capital loans.
Working capital loans provide you with enough funds to allow you to complete a revenue-generating cycle. This means that the loans you get from the bank will allow you to produce, market, sell and make your profits in one sweep.
You are expected to make enough profits to fund the next revenue-generating cycle and pay off your loan when you take bank loans. This type of loan is given to businesses that already have a product and have gained traction. The traction and records of the company are some of the things considered while giving out the loan.
On the other hand, the funding loans are more suited for early-stage startups without any product or service. This loan type involves creating a business plan, a project report, and the startup’s valuation details. These documents are accessed and used to determine whether or not the business gets a loan and the loan amount.
With a small business line of credit loan, a business can access funds from a bank when needed. This loan usually has a cap, say $100,000. This means that the business can gradually take up to $100,000 as a loan from the bank when needed. This type of loan is useful for improving the business’s cash flow and settling emergency expenses.
Bank loans do not attract interest until you have drawn down the loan. You get to pay the interest monthly, and the loan itself is amortized over the years. The only downside with this loan type is that you renew the line of credit every year, which comes with additional fees. If you fail to renew the line of credit in a year, you must pay back the loan within the year.
To part away with some stake or equity in your business. You only need to pay interest on the loan you got. The last loan type is the equipment loan used to purchase equipment for the startup. You usually need a 20% down payment, and the equipment is used to secure the loan. As with other loan types, the equipment loan comes with interest, and you have to pay it monthly. Also, the loan itself is amortized over 2-4 years.
How bank loans work in your area may vary to the above, so it's recommended to book an appointment at your local bank to explore how to raise funds for your business start-up.
Raise Funds for your Business using Customized Templates
Money is the bloodline of all businesses, which is true for even early-stage startups. Thus, if you want to raise funds for your business idea or early-stage startup, you can use any of the approaches discussed in this blog post.
A crucial part of the fundraising process is pitching. Pitching is viable in almost all of the funding options discussed in this article, and as we have mentioned, it could make or mar your funding process. This is one of the reasons BaseTemplates exists.
BaseTemplates provides high-quality fundraising templates for entrepreneurs that help save time and money starting a business. We understand the importance of a pitch deck to you. Therefore, we provide extensive options for pitch deck templates for a successful pitching and fundraising process. Visit our website to check out an appropriate template for your pitching process.
If you have any more questions about how to raise funds for business start-ups, then feel free to get in touch.