Most startups usually commence with an idea, high expectations, and investor confidence. Nevertheless, a few circumstances can either make or break any startup. According to several studies, it was demonstrated that startups within the first year often cede due to several reasons. The salient requisite for any startup to thrive is none another than startup capital.
When it comes to funding for your startup, it is imperative to comprehend different kinds of potential investors. Not every wallet is apt for you. Here we're going to share some potential ways of finding and raising capital for a startup to help you get started.
What is Startup Capital?
Before you proceed further towards sources of startup capital, let's first have a quick look at startup capital definition.
The term startup capital is the money raised by a new organization to meet its initial costs. Entrepreneurs who desire to raise capital need to form a solid business plan or construct a prototype to sell the idea. Angel investors, banks, venture capitalists, or other financial institutions are among providing startup capital. Startup capital covers the company's major initial expenses required to get a new company up and running, for instance -
- Leasing or renting space
- Furnishing the office
- Purchasing equipment and supplies
- Stocking inventory
- Hiring professional services like lawyer or accountant
- Paying employees
- Product development
Top 5 Sources of Startup Capital
Are you ready for it? Below are 5 of the most common sources of startup capital.
1: Friends and Family
Usually, the first check comes from a dear friend or a family member. Theoretically, it is quite easier and simpler to close them as they already know you well. Sometimes, in practice, this is discomfited and may lead to very awkward situations in the future.
For instance, if a friend offers you $20,000, and the startup goes belly up, you may end up losing lose this friend. All we want to say here is that think carefully before you take money from friends and family. It can be great or could be extremely bad. Every scenario is different. Another important concern is that family and friends may not clearly comprehend the risk and how business startups work. Take the time to enlighten them, and if they truly get it and still like to participate in, you're all clear and go ahead.
2: Angel Investors
For those seeking $25,000 to $250,000, angel investors can come in very handy.
In essence, an angel investor is anyone ready to put money and time into your idea. They can come from any background and are generally venture capitalists or former entrepreneurs. They are driven by the potential of significant returns, the capability to give back to the entrepreneurial community and provide mentorship to new entrepreneurs. Partnering with a great angel investor could be a gamechanger because their industry knowledge and access could be an extra enrichment to your team. A great way to find angel investors is through your network, financial advisors, or entrepreneurial scene. There are even angel investing networks and platforms like AngleList.
3: Venture Capital
The first thing to consider is that startup venture capital is not essential for all entrepreneurs. You should know those venture capitalists seek technology-driven companies and businesses with high-growth potential in areas such as biotechnology, information technology, and communications. So, don't look for them unless you require more than $1 million. VCs take an equity position in the organization to assist them in carrying out a promising but higher risk project. It incorporates giving up some equity or ownership in your business startup to an external party. Ensure to look for investors with relevant knowledge and experience to your business.
4: Business Incubators
Business Incubators usually target the high-tech sector by offering support for new startups in numerous phases of development. However, there are even local economic development incubators that are focused on sectors like job creation, sharing, and hosting services. Typically, incubators will welcome future businesses and other thriving organizations to share their premises and their logistical, administrative, and technical resources. For instance, an incubator might share the utilization of its laboratories so that a new startup can develop and test its products more affordably before commencing production.
5: Bank Loans
We utilize backs every day, and back loans are a common source of startup capital. A back loan is money you borrow over a particular period from the bank. To get a loan from the bank, you'll have to convince the bank of your project's practicability and your capability to pay back the loan on time without creating any problems. Your loan application with be reviewed. Generally, banks will emphasize on your future cash flows, which is not great for business startups. However, banks offer lots of products exclusively tailored to a company's requirements in all types of situations.
Dropshipping - Low-investment Business Idea
Dropshipping is an easy business to commence. It is a fulfillment model where a 3rd-party supplier is accountable for storing and shipping inventory to customers on your behalf. It is indeed one of the best businesses to commence as it is low overhead. You don't have to deal with any products yourself - you merely have to make sales and pass orders on to the supplier you choose.
One of the major benefits of dropshipping is the lower startup capital requirement. Without the need to maintain inventory, your costs are confined to listing/hosting and other setup fees. In all, dropshipping is one of the quickest and cheapest businesses to start up and running.
Last Few Words:
After going this post concerning how to raise capital for a startup, you might have realized that startup funding is not as challenging as many young business owners think. All you need to do is to pitch your startup model effectively in front of the right ones, convince them that your idea has the potential for profit in the future.