Options to raise capital for Startups
In this socioeconomic world where technology is booming at a viral pace and reaching each and every possible target of interest, makes it more viable for carrying out the implications of diverse ideas by multiple entrepreneurs, according to their respective business projects to get exposed in front of waiting investors of multiple kinds.
Resources are multiplying with new courage and enthusiasm in various forms, this evolving information sharing processes, making an easy access for almost everyone to have something new for their business growth prospects.
Here are few ways to raise money for startups (especially at the initial stages of their projects):
Also known as “Bootstrapping”, practically viable for small-scale enterprises, involving a fund collection from Self-saved (personal funds) resources and family or friends, and they will be called as “Bootstrappers”.
The flexibility of interest rates and easy access is a striking feature, in turn making a stress-free, focused environment (peace of mind) for the borrower in concern to business requirements.
When compared to venture capital, an entrepreneur with little capital, usually have all the controls about any decision make up for startup.
Diluting ownership between investors isn’t involved as its a personal investing.
Low-capital personal investing, Credibility issue due to the absence of strong, known, respected ventures or investors and longer time for target reach are a few major concerns to be dealt with.
To execute this successfully, an entrepreneur must have a concrete pre-designed framework for their project details, explanations, as this source has to be shared on social media platform (easy accessibility via vast networks), in general, making a great exposure in front of the expected ones (investors, ventures, public).
If same makes an impact, then investors make a pledge to support asked business model publicly and funds will be donated from their end.
Creating a public interest through sharing or posting creative mediums like images, banners, videos etc.) that would be reflecting the core message for the cause, is a high point.
A diverse presence of competitions for the same source is very high, startups must be able to present a unique and credible approach to waiting investors.
Check Kickstarter & Indiegogo, popularly known for successfully finding for various projects (crowdfunding).
- Angel Investor
When a startup needs a boost or capital momentum for the major growth purpose for their ongoing projects, thus Angel investors (informal investors, angel funders, private investors, seed investors or business angels) may come into focus on helping them rather than expecting a possible profit they may get from the business.
Usually, they represent individuals, that actually provides the fund or Angel Investor may be a limited liability company (LLC), a business, a trust or an investment fund
They are the opposite of venture capitalists or lenders, as they often are family members or close friends.
Their own money, unlike venture capitalists, will be used in turn acting as a pooled money in conjunction with other sources of investments for placing them in a strategically managed fund.
- Venture capitalists
Individuals or group of professionals as with a keen prospect towards companies or a startup seed money) having a solid business.
They effectively monitor the growth of a company through their mentorship (ideas or suggestions, investment decisions), they have invested in, in turn ensuring the sustainability and effectiveness of their investment with a goal to achieve business success.
They have money and they’re willing to spend it, that’s why they reap a potential for their presence in comparison to the conventional banking system (loans) for startups.
Venture capitalists/investors seek bigger companies with proven levels of stability and identifiable workforce, thus a major filtering for multiple startups in competitions happens.
And, ventures will always tend to take control over the decisions for company success, so a startup may find it difficult to raise their concerns every time.
- Incubator firms (Business Accelerators)
They can be either a nonprofit or a for-profit entity, with a purpose of accelerating early-stage companies (seed capital) by engaging through their developmental processes and stages until those companies reach sufficient financial, human resources, and physical resources to function on their own.
Their modus Operandi can be justified by their accessibility towards:
-Financial capital through relationships with financial partners.
-Experienced business consultants and management-level executives.
-Physical location space and business hardware or software.
-Informational and research resources via relationships with local universities and government entities.
They tend to gain equity in an early-stage company with strong growth prospects and sometimes taking a stake in the company at starting phrase itself.
Their credible and unique incubator process, with startups, encourages or improve ideas and learning, to convey their plans to customers and potential investors, through working with advisors and mentors, who will offer their experience in the business world to help address queries and dilemmas.
- Bank Loans:
Let’s understand it in 2 ways-
- The Working capital loan– One complete revenue cycle from operations is considered, where draft limit sanctions are based upon stockists and debtors.
- Funding- Borrower have to explain their business model with all relevant formalities like valuation, future prospects and other credible inputs (investors), which will move through a usual process of sanctions.
A well structured business plan can convey the modus operandi from borrowers end in concern to, profit forecast and estimated time of maturity.
Large capital could be ensured, provided an overall Project strength is available to startups. In turn infusion of boosting mechanism for required inputs for business growth can be assured.
- Micro-financiers (NBFCs)
Non-Banking Financial Corporations (NBFCs) supports individuals/startups, lacking access to conventional banking system or legalities and seeking capital for their small-scale enterprises.
NBFCs classification comprises of a wide range of companies offering bank-like services like credit unions, insurance companies, money market funds, asset managers, hedge funds, private equity firms, mobile payment systems, micro lenders, and peer-to-peer lenders.
Low credit ratings reduce chances of banking loan arrangements for small-scale entrepreneurs, thus microfinance institutions came to their rescue.
Here, Investors have the opportunity to build a diversified portfolio of loans by investing small sums across a range of borrowers as an offer like banking services such as loans and credit facilities, retirement planning, money markets, underwriting, and merger activities are available.
- Government Programs
There is a definite structured grant committee for government programs for startups in concern to capital requirements, especially for small-scale business borrowers. From time to time various schemes could be observed through government channels of communications.
A substantial amount of funding startups can be seen as a surplus capital for eligible entrepreneurs.
It might take a stretched process of scrutiny, approval and eventual release of funds due to government bureaucracy system, but not necessarily every time. Transparency has been infused into the system due to modified and innovative technologies in financial processes has proven a significant change for faster execution of requirements provided startup business has all validly required formalities.
by Mahshid Javaheri
After working as a solicitor for 3 years, Mahshid joined Legafit.com as an Editor and contributor of legal content. Mahshid is passionate about connecting practicing lawyer with the wider business community; she helps lawyers create and distribute insightful and actionable legal content that delivers value to businesses, whilst showcasing the lawyers’ expertise.