Money is very important and it becomes even more important when it comes to a startup. You have an idea and a passion to work on it with all you have got but money is where all the problem starts. This guide illustrates one way how to raise money for a startup, especially for first-time entrepreneurs.
Angel Investing –
You can start by looking for angel investors for your startup. Angel investors are basically successful entrepreneurs who have made their fortune in the business and are now looking to invest their money back into startup businesses. Whether it’s Facebook, Google or Twitter, all these world famous businesses have had angel investors in the past. Angel investors bring more than just money to the startups. They come with a bank of connections and advice which can prove to be very beneficial to the startup. Some of the biggest Angel networks that connect entrepreneurs to investors are Investors Circle, Golden Seeds and Tech Coast Angels. Angel investors can indeed prove to be the Angels for your startups.
Bank Financing –
This is the most famous and used means to raise money for your startup. When taking a banking loan, your banker may demand that you have your loan agreement guaranteed by the Small Business Association (SBA). Once the agreement is guaranteed by the SBA, the loan is approved. The SBA is basically a government agency which guarantees up to eighty percent of the value of the loan for applicants. Only applicants who meet their criteria are guaranteed by the association. If you don’t want to go the SBA way, you can also use some other form of security such as your home etc. to get your loan approved.
Business Partner –
Let’s assume that you’ve a brilliant idea for a business but have no money to invest in it. You can either drop the idea altogether or turn to your wealthy friend or acquaintance for help. Many of the top businesses have received seed funding from a co-founder. While selecting a business partner, you’ve to be extra careful about certain points. You should make sure that their own business aspirations and goals are in sync with yours because as a business partner, he/she will also have a control over the direction of the business.
Family and Friends –
Family and friends are the ones who stand with you through your thick and thin. If you don’t want to take the pressure of a bank loan, you always have an option of turning to your friends and family for help. They can loan you money on flexible and mutually agreed terms and conditions.
Crowd funding –
Though Crowd funding as a means of raising money for startups is still in its initial stages, it is slowly becoming popular with the young entrepreneurs. Crowd funding as the name suggests means receiving funding from the crowd. In this, the public makes use of their own personal funds to fund your startup idea. You just need to put your idea on a crowd funding idea and people can then choose how much money they want to give to your idea. Many of the crowd funding sites work on a reward based model where people who agree to invest in a particular business idea are given a reward such as the product that is going to be produced. Some famous crowd funding sites include Fundable, Indiegogo and Kicstarter.
Venture Capital –
You even have the option of turning to Venture Capitalists to raise funds for your startup. Venture Capitalists are people who invest in early stage businesses that have a high potential to grow in future. They traditionally receive equity in the startup business in return for funding it. However, nowadays the trend involves demanding a mixture of debt financing and equity.
Convertible Debt –
This means of raising money has become popular in the last few years. It has become popular because of its phenomenal success with Y Combinator Startups. Yuri Miller and SV Angel have offered $150,000 in convertible debt to every Y Combinator Startup. A convertible note by an investor converts the debt to equity in sometime in the future. This conversion is at a discount to the next funding round that the business raises and has a cap, which means if the business is successful in raising a huge round, the debt investors have protected themselves from getting diluted. In Convertible debt, you don’t have to set a valuation. This is taken care in the next round of financing. Plus, it helps to keep the costs lower as it requires less paperwork.
Second Mortgage –
You even have the option of second mortgage for raising money for your startup.
Credit Cards –
They can be used as a temporary measure between getting your company started and obtaining other financing such as getting your bank loan approved. Most of the credit cards have interest rates as high as 10-20%, hence they are not considered a good source of loan term capital. Many entrepreneurs in the past have used credit cards as a source of money for their businesses when they had no other option. Even Google, the search giant, was funded by credit cards by its founders in the mid 1990s.
Incubator Funding –
You can even get your startup incubated in incubators in India such as Microsoft Ventures (Bangalore), Startup Village (Kerala), IAN Incubator (Delhi), CIIE, IIM-Ahmedabad or global incubators like 500Startups, TechStars or Y-Combinator. These incubators offer more than just money to the startups. They even provide the startup with the much needed guidance and mentorship along with the money. The startups get to be a part of a huge network of successful entrepreneurs that helps them in getting in touch with potential customers and partners. At the end of the program, the startups are provided with an opportunity to present their ideas in front of venture capitalists and angel investors.