Financing a new startup is always a tricky situation that you have to navigate carefully.
It’s true that you can be creative and start a business with very little startup cash – where you’re selling your own time as a service, it can take a while to get this off the ground and even then you need a good website, branding, and marketing, as well as the write technology setup. If you want advice on how to afford your website – get in touch!
It’s worth thinking about all the options, as a lot can go wrong if you approach this without a concrete plan. Depending on the type of business you’re trying to start, some approaches will work much better for you than others. And in some cases, you may need to change course on short notice if things don’t work out.
Let’s take a look at some of the most prominently featured finance options for startups, and the implications that each of them carries for your company.
1. Angel investors
Relying on angel investors is not suitable for every type of business, but it can occasionally produce some great results. There are lots of angel investors operating on the market at any given time, and some of them are willing to contribute large sums of money as well. Long-term expectations tend to be more reasonable when working with angel investors, which is another great point in their favor.
On a related note, Roll Up Vehicles (RUV) are another investment option that deserves more attention in the current market. As with angel investors, it’s not automatically suitable for every company out there, but it can definitely produce some solid results when approached correctly. Check out this article for an example of someone who’s leveraged the benefits of RUVs successfully. Decibel are not even a unique case here. The company had a solid proposal and a good plan, and that covered the majority of what they needed for a successful RUV campaign. Their article provides some interesting insights into their experience.
Crowdfunding has gained a lot of popularity in the last couple of decades, mostly due to the advance of the internet and its widespread adoption. It’s a good way to raise funds for various types of businesses, and many companies have shown that it can be a completely viable financing approach on its own. However, crowdfunding can also be less reliable than other financing methods, and comes with a bit more risk.
One positive side to crowdfunding compared to other financing methods is that it also takes care of marketing to some extent. If a campaign gets popular, this often creates a snowball effect where people continue to spread the word about it, drawing even more investors. However, this is not how every crowdfunding campaign plays out (far from it), and you have to be prepared for a potential disappointment.
3. Venture capital firms
Venture capital firms are a commonly considered alternative to angel investors. While the general idea is similar, there are lots of underlying differences between the two approaches. Venture capital firms represent the interests of multiple investors (as opposed to angel investors, who typically operate on their own), and they are usually stricter in their expectations, and more risk-averse.
This means that you might face some shorter deadlines for delivering results, and you will usually have to check in with your investors on a regular basis. On the other hand, venture capital firms are usually much more willing to invest larger sums of money, and it’s not rare to see them pouring several million into a single startup when they see a good potential return from it.
4. Government grants
Government grants are a very individual instrument that works in specific circumstances, and they usually come with some specific requirements about the state of your company and how the funds are going to be allocated. But if you can qualify for one, it can be a great way to inject some additional funds into your initial operations.
- For the US check out this page on howtostartanllc.com.
- For the UK check out this page on Startups.co.uk
Keep in mind that government grants alone will usually not get you very far. They are best used as an auxiliary financing platform, with some very specific exceptions where a company might qualify for several large grants that could set it up for a start. You will need to put a lot of time into researching the applicable grants for your company.
Last but not least, there’s no shame in taking out a loan to get some initial funding. This is not the most ideal option in terms of how your returns will be reallocated, and you’ll often end up paying more compared to other funding options. But at the same time, loans are reliable and predictable, and you know exactly what you’re going to get, given your current circumstances. Used correctly, loans can be a great way to secure additional funding for your company, and can sometimes be your main source of funding too.
Even if you’re sure that a specific funding option is going to work best for you, it’s still in your interest to explore your full range of options and see if you can’t gain additional benefits from an alternative option. You never know when you might come across something that produces even better results when you don’t expect it. The financial market is constantly evolving too, so some of today’s solutions may no longer be relevant tomorrow.