Innovative ideas for financing tech start-ups have made it easier for budding entrepreneurs to deal with the hiccups involved in raising capital. Gone are the days when business owners had to run around local banks and other financial institutions for raising funds for their company. The digital age has made it possible for them to connect with investors from across the world. Entrepreneurs today have a number of financing options including venture capital. Here is an explanation of the most popular ones.

Venture Capital

This is the most common source of funding for new tech start-ups. Venture capital is an active form of financing option available to new firms, with high risk and equally high growth potential. Venture capitalists are people who invest in firms and make money from the company’s equity, rather than debt. Companies that are considered for this type of financing are usually businesses that have a high growth potential and for some reason, which could be size, assets or development stage, cannot seek funding from traditional sources like banks and government institutions.

Along with shares in the company, venture capitalists also seek an active role in the company. Venture capitalists keep a track of the growth and development of the company by actively participating in the company’s governance, strategic planning, capital structure and board participation. They not only offer money, but also contribute to overall growth of the company by adding value with their business acumen. Unlike traditional sources of financing, venture capitalists have their interests vested in the company for a long-term.

Venture capital is also referred to as “patient” financing for it gives the company sufficient time and waits for it to deliver results. However, long-term in venture capital does not necessarily mean indefinitely. Venture capitalists are always prepared with an exit strategy.

Angel Investors

Angel investing is another type of financing option that is used by wealthy individuals to encourage start-ups in the technology and other industries, for a share in the company. These investors, unlike venture capitalists, may not be professionals and can be from any field. They could be executives with money to invest or they could be retired businesspersons looking for ways to support likeminded people and earn some profit at the same time.

Angel investors also seek to invest in solid business models that have high growth potential and are managed by a reliable management team. The people involved in the company, the operations and the capital structure and the overall scope of the business are considered by these investors for analysing the company and determining whether or not to invest in it. Angel investors usually -

- Seek to invest in companies from a field that they are familiar or comfortable with

- Tend to co-invest in start-ups managed by their friends or family

- Invest more than their money; most investors are also ready to share their business experience and acumen to help the start-up grow quickly.

Angel investors also work in groups. In this case, the archangel or the head angel analyses and determines the companies they would invest in.

Crowd Funding

This is one of the most innovative forms of financing options that has gained popularity in the digital age. Crowd funding brings together a number of people, both individuals and companies, who contribute small amounts to raise capital for a business. The funding is usually done via crowd funding sites on the internet and sometimes even through social networking platforms. This type of business financing relies heavily on networking, where a business gets funds in small measure from a network of people including friends, family, friends of friends and so on.

Crowd funding is an innovative idea that has helped several entrepreneurs achieve their dream of business ownership. However, crowd funding mostly works on word-of-mouth advertising to attract investors and can take considerable time and effort to bring the desired results.

Popular crowd funding sites that entrepreneurs can visit today include Kickstarter, Fundable and Indiegogo.

Revenue Based Funding

Revenue-based financing is an excellent option for tech start-ups that do not want to pay interest or have a fixed loan obligation. This type of financing is offered by investors for a share of the revenue in return, until the capital they have financed plus a multiple (or cap) is repaid. This type of financing is offered when the investors believe that the business model can generate enough revenue to clear the capital amount in a period of 4 to 5 years. Investors in this format of funding are private financial institutions, who believe that the better a company performs, the quicker it will clear away its debts.

Tech start-ups can also consider options available from the government, such as grants if they are eligible for it. This could include local enterprise boards. In any case, it is wise to consider a financing option keeping in mind its pros and cons. The amount you need, the time taken to repay, the terms and conditions, loss of control in business governance ( in case of angel investors and venture capital) and time taken to raise the capital should all be considered before you make a choice.