The Most Realistic Sources of Finance for Startups
Many new entrepreneurs often think that exciting concepts and well written business plans are all it takes to secure funding from banks or investors. It is easy to underestimate the magnitude of the task while under the delusion of the ‘exciting business concept’, that is until you taste the waters. Getting funds in the early stages of a business is never as easy as envisioned. It is highly advisable to mentally prepare for a rough and unpleasant battle because there will be many heartbreaks along the way.
The most important thing is to avoid wasting your time looking startup capital in the wrong places. You should also ensure that the business plans are flawless before approaching any potential investors. No one wants to invest in anything that does not look well thought out. Here are two short articles I would highly recommend you read in order to help set up a strong business foundation and ensure that the startup is an attractive investment proposition:
Creating your entire business growth strategies around an ‘investment’ that is yet to be acquired can be a detrimental mistake. It is more advisable to create plans which leverage on your hands-on skills and expertise, and those of all the people associated with the startup, rather than plans which entirely rely on the investment. Planning in such a way ensures that the venture can still take off with or without capital from investors. Before we look at the most ideal sources of finance for startups and small businesses, here’s why banks are a waste of time and should be avoided altogether.
Why you should not waste your time with Banks
Banks are one of the most popular sources of finance for many established companies around the world. The problem is that they tend to regard startups as being ‘unsafe’ because they don’t usually have sufficient collateral (fixed assets) or a proven financial history which they can comfortably leverage on. While the status of the venture remains an ‘idea’ or a ‘startup’, you’re better off not wasting your time seeking capital from banks. Their policies would disqualify you from a loan, and that is after undergoing a lot off stress in the application process. Time is of the essence and do not waste it snooping around the wrong places.
Please note that this only applies to startups and business ideas that are yet to take off. Businesses that are beyond these stages could qualify for loans.
Funding a small business
1. Bootstrap until you gain momentum
Bootstrapping means to start and grow a business by using the resources which are available at hand, and without external capital. A venture that is ‘bootstrapping’ is simply funding all of its growth through its internal resources and expertise.
The concept of ‘growth hacking‘ also falls within bootstrapping. Its goal is simple; to achieve unprecedented business growth within a relatively short time. I would highly recommend you read through ‘The Art of Growth Hacking‘ to understand how you can implement the tactics to achieve rapid growth like Uber and Airbnb did.
Bootstrapping is absolutely fundamental for startups because the entire basis for early growth is tied around the entrepreneurs’ hands-on efforts, and not external factors such as bank loans. It calls on the business owners to dig deep into their pockets, and if need be, to sell things that they own in order to raise some cash.
In such circumstances the entrepreneurs have to do the door to door sales themselves rather than hire salespeople, work from home rather than rent an office space, put in 14 hours shifts rather than 8, etc. Bootstapping is a onetime sacrifice and is only undertaken until the business gains momentum and can afford to external help.
Not many entrepreneurs view this as a viable source of finance because they are unwilling to get down on their knees and do the dirty work. A company that bootstrapped in its early days may not have extensive business loans that hold it down. It also may not have too many investors who own stake in the company and will for a lifetime breath fire down its neck. It is in a sense a sacrifice for freedom later on.
2. Friends and family
Asking friends and family for money is a daunting prospect for most people. It is nonetheless a viable source of financing when bootstrapping is no longer practical. Although your friends and family may genuinely want to see you succeed, getting funds from them is not as easy as the words ‘friends’ or ‘family’ implies. This may be due to several factors such as being afraid that you will not pay them back, or just not trusting your business instincts because they only know you in a social context.
Whatever the specific reasons, most people fail at raising money from friends and family because of failure from their part to present a well-defined proposal and business plan. They usually present verbal proposals because ‘friends and family’ is presumed to be informal and less serious. An unprofessional presentation makes the presenter look unprofessional. Even if you know that your friends do not care much about budgets and projections, presenting it to them shows that you know what you’re doing.
Pitching to friends and family should be approached as though one were pitching to actual investors. They need to be made to understand the entire business and revenue models, the projections and how they will get a return on their investment. All the formalities have to be in place and they need to be given confidence that their investment is not a donation. Very importantly, they need to understand the risks involved.
There has never been a startup that right from the onset had guarantees of success. Anything can happen in business and money lost in an instant, making them understand this will play an important part in case things go downhill in the future.
3. Crowd Funding
Funding a small business is a challenge that calls on the entrepreneur’s creativity and ability to think outside the box. Crowdfunding has risen over the past decade to become one of the most popular sources of finance for startups. It allows for small-time investors who generally have fewer restrictions to invest in the business, as opposed to the seasoned investors who are often keen on historical records.
Crowdfunding gives entrepreneurs an opportunity to remotely raise capital from a global network of people, regardless of whether the venture is still an ‘idea’ or has already taken off the ground. Between the years 2009 and 2016, more than 104,000 projects were funded through Kickstarter alone; that is over $2.3 billion worth of investments.
The number of ventures that have successfully raised money through crowdfunding is solid proof that it is a viable way to get funds at an early stage. In 2012 Oculus raised $2.3 million in their crowdfunding campaign on Kickstarter, that was before being acquired 2 years later by Facebook for $2 billion.
The most popular crowdfunding websites are Kickstarter and Indiogogo. Each platform attracts thousands of small-time investors that hope to invest in ventures that will be ‘the next big thing’. The main difference is that Kickstarter only lets you keep the money if you manage to raise your entire fundraising goal; whereas Indiogogo lets you keep any amount that you raise, however take a cut from it. The beauty is that it all happens remotely; you set up the crowdfunding campaign online and instantly become visible to thousands of people from all over the world who are looking to invest.
This particular post does not cover several other common sources of finance for startups such as angel investors and venture capitals. The 3 mentioned have time and again been proven to be the most realistically achievable for new ventures.