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Business Startup Consulting Services. Photo by Digiaarikumari.

Startup Financing: 10 Funding Options for your Startup

Most business startups are started with very high expectations and entrepreneurs usually have a lot of confidence in their long-term viability. 

Unforeseen circumstances in the first few years of startups can lead to their closure.

To obtain advice on types of financing available in the market, business owners can seek advice from  consultants such as Business Startup Consulting Services for professional advice. 

A comprehensive research conducted by experts showed that up to 20 percent of start ups fail with the first year, 50 percent fail within five years while within the first 10 years about 65 percent do fail.

There are several factors which lead to this high failure rate of startups. One of the main factors for failure of startups is lack of adequate financing. Entrepreneurs usually encounter cash flow constraints which force them to close down.

Adequate capital is very critical for the future survival of any business. Startups tend to fail if they are underfunded as they lack sufficient cashflows to remain competitive in the market.

An in-depth understanding of the funding options available for startups is therefore important to ensure the business does not close due to cashflow constraints.

The 10 funding options for your startup include the following.

1. Entrepreneurs Can Bootstrap Their Business as A Funding Source

Michael Dell. Photo by Oracle PR from Redwood Shores, Calif., USA.

Bootstrapping your business is a source of startup financing which requires you to have some funds saved up which you can access easily or obtain funds from family members and/or friends to finance the startup.

Having funds saved up or securing funding from family members and friends will ensure your business is adequately funded and will not fail due to lack of adequate funding.

Bootstrapping your business has various advantages. One of the advantages is that funds can be accessed easily since in many cases there are no agreements signed.

Friends and family members offer the funds at no interest at all and even where it is levied the rate is usually very low compared to the going market rates.

However, bootstrapping your business only works for small businesses but not with large enterprises.

There are various methods that you can use to bootstrap your company. The first method is owner financing which involves use of personal income and savings to finance the business startup.

The second method is personal debt which involves using personal credit card to obtain funds. The next method is where you contribute to the startup inform of personal effort usually called sweat equity.

Keeping operating costs as low as possible, minimization of inventory and government subsidy inform of tax reductions or government cash payments are also methods of bootstrapping the startup.

One of the most successful corporate entities which was funded through bootstrapping is Dell Computers.

Founded in 1984 by Michael Dell, the American technology company reported a turnover of US$101.6 billion in 2022 and as at 2020 had a workforce of 165,000 employees.

Other well-known and respected companies funded through bootstrapping include Apple Inc., Microsoft, eBay etc.

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2. Crowdfunding Is Another Source of Funding Startups

Palma Luckey. Photo by Derrick Coetzee.

Modern technology has made it possible for people to interact on social media platforms and share the problems they are facing.

Individuals can pitch their business ideas or challenges to a community of investors willing to support their ideas through crowdfunding platforms.

Those ideas pitched successfully get support from the investors who pledge to fund them. 

One of the advantages is that crowdfunding creates interest from the public which creates a market of the products of the startup as well.

Crowdfunding has the potential of attracting venture capital investment which would substantially solve the financial needs of the company in the long term.

The main disadvantage of crowdfunding is that getting the crowd funders to pay interest to your startup idea may not be that easy since there are many other startups also seeking for financing from the same source.

One of the startups that was funded through crowdfunding and is today a success story is Oculus VR.  

The company was founded by Palmer Luckey who started a crowdfunding campaign in 2012. 

He raised over $2.4 million making it one of the biggest crowdfunding success stories at the time and his campaign attracted 9,500 backers.

The company was acquired for 2 billion dollars by Facebook in 2014.

3. Angel Investment Is Another Source of Startup Financing

Jeff Bezos. Photo by Seattle City Council from Seattle.

Angel investment is another source of financing available to finance startups. Angel investors are basically high net worth individuals ready to invest in cutting edge ideas.

Sometimes angel investors came together to scrutinize proposals and choose the ones they believe stand a better chance of succeeding in the market and invest in them.

The main advantage of this type of startup financing is that apart from providing funding, angel investors also mentor the entrepreneurs which enhances their chances of success.

Since angel investors anticipate heavy returns from the startup they are willing to take on risks on the business idea.  

The main disadvantage is that compared to venture capitalists, angel investors provide less funding.

One of the most famous angel investors is Jeff Bezos the founder of Amazon, the largest retailer on the web.

Recent reports indicate that he has invested in eleven startups with investments starting from $1.5m.

4. Venture Capital Is Another Source of Funding for Startups

WhatsApp. Photo by WhatsApp.

Venture capital funds are funds usually invested in companies which have high growth prospects in the market. Venture capital funds are managed by professionals with certain cutting edge skills.

Before a financing decision is made, due diligence is done on prospective companies to determine whether they meet the criteria set by the venture capitalists. Only those companies that pass this stage access funding.

Venture capitalists later exit the investment through initial public offering or during acquisition of the invested entity and then use the funds to invest in other upcoming investment opportunities. 

The main advantage is that venture capitalists provide mentorship and monitor the progress of a company they have invested in which enhances their chances of success.

The main disadvantage is that you end up losing control of your startup as venture capitalists demand a large stake in the business before investing.

The best example for venture capital funding was the investment of Sequoia in WhatsApp. Sequoia invested $60 million in WhatsApp for 18% stake in the company.

Facebook acquired WhatsApp in 2014 for $22 billion which in effect grew Sequoia’s investment from $60 million to $3 billion which was a return of more than 50 times.

5. Business Incubators and Accelerators Is Another Source of Financing for Startups

Business incubators and accelerators are known to provide financing to startups.  They provide the funds through programs they offer designed for that purpose.

Accelerators usually fast-track business while business incubators nurture businesses. The main advantage of this type of financing is that business owners receive mentorship and connections with other startups which enhance their chances of survival.

The main disadvantage is that if commitment is lacking from the business owner the business might collapse.

ZX Ventures, which is headquartered in the United States of America provides business incubation and acceleration to startups in the food and beverages sector. The company is headed by Bernado Novick.

P&G Ventures is another US based in-house incubator that partners with startups, entrepreneurs, and inventors to build brands and businesses.

The company which focuses on companies in the consumer-packaged goods space was founded by Leigh Radford in 2015.

6. Winning Contests Is Another Source of Funding for Startups

Winning contests is another source of financing for startups. The most common competitions or contests require business owners to pitch their business model against other competitors who are also seeking for the same funds.

To win investor confidence, contestants are required to present a comprehensive and detailed business plan which is then evaluated before a decision to fund is made.

However, losing contests and entertainments can demoralize some entrepreneurs which could derail their ambition of starting a business.

7. Obtaining A Bank Loan Is Another Source of Funding

Startups who have a solid business plan can access financing from banking institutions. For a business plan to be acceptable it must be structured well and the business owner must meet all the conditions set by the bank.

 The information captured in the business plan must capture the modus operandi, financial projections during the term of the loan and the estimated term of the loan.

Banks provide various financial products which include working capital loans and term loans which startups can access to finance their operations.

One of the most well-known startups funded through bank loans is Kitopi; a company which operates a network of cloud kitchens or virtual kitchens.

Kitopi was founded in 2018 in Dubai, UAE by Mohamad Ballout, Saman Darkan, Andres Arenas and

Bader Atay and is headquartered in Dubai as well as New York in the USA.

The main advantage of bank loans is that entrepreneurs can access large amounts of capital which may not be available from many other sources.

The main disadvantage is that startups risk losing their collateral since loans financed by banks are normally secured by tangible security such as land and buildings.

8. Startups Can Approach Microfinance Providers or Non-Banking Financial Institutions for Funding

Microfinance providers normally provide small scale entrepreneurs who lack access to financial products from conventional banks with funds to finance their startups.

Business owners with poor credit rating can access financing from microfinance providers.

Non-banking financial corporations also provide loans to individuals without imposing strict terms and conditions like banks do.

The main advantage of this type of funding source is that the startup may access funds easily.

However, the downside is that these sources may not provide adequate financing to enable a startup scale up its business to serve a wider customer base.

9. Startups Can Access Funding from Government Programs that Offer Startup Capital

Another source of financing for your startup is Government programs that offer startup capital.  A grant committee is usually set up to evaluate business plans submitted by entrepreneurs.

Entrepreneurs whose business plans are approved are provided with the finds requested for to finance their startups.

The main advantage is that startups obtain sufficient funds to finance their startups as governments grants are usually large.

The main disadvantage is that due to government bureaucracy the process of scrutiny, approval and eventual release of funds might take a very long time.

10. Selling of Assets, Product Pre-sale And Credit Cards Can Be Sources of Funding

Apple Inc. Headquarters. Photo by Daniel L. Lu (user:dllu).

Startups can pre-sale their products before launching them, officially to customers. This enables entrepreneurs to size up the market and build consumer confidence.

Companies such as Apple Inc and Samsung adopt this procedure when raising funds to finance their startups.

Entrepreneurs can also dispose of high value assets to finance their startups. Such assets might include high end cars, houses, animals etc.  The main advantage is that the amount raised does not have to be paid back.

As long as they fulfil minimum requirements, startups can access funding from business credit cards as they provide funding instantly.

Conclusion

There are various sources of funding for your startup as discussed herein. Employing the startup funding sourcing strategies as discussed in the foregoing can greatly enhance the chances of survival of your startup.

Bootstrapping is the best sources of funding of all other sources discussed hereabove.  

Bootstrapping can be used to kickstart the funding campaign and then move on to other types as circumstances allow and according to the needs of the business.

To remain competitive in the market it is critical that you interchange the sources of financing as each source has ups and downs.

 It important for entrepreneurs to avoid over-dependence on one source and also have some level of flexibility as far as sourcing funding goes.