Ways to Raise Money for a Business
Take a moment to ask: Is it money that builds a business or is it the other way around?
Well, it does seem clear that you ought to put in some money into a business for it to make more money and this is true especially at the start of any business. But for a business to become operational, generate revenue, and have long-term sustainability it needs a lot of other things apart from just finances. However, no strategy, idea, or resource can alone form a business too without the help of one significant factor: capital, financing or investment.
Nevertheless, the interesting thing about money is that one does not always necessarily have to have it personally to start their business.
When funds cannot be raised personally, an entrepreneur can come up with the required capital through various other external means.
This is dependent upon aspects of the business idea being lucrative or strong enough to attract this outside funding.
Let us discuss some of the best ways of raising funds for start-ups, but before this, it should be noted that these techniques do not have to be a stand-alone concept. More than one or even all these methods can be used in combination and over time to garner the money needed.
1. Family, Friends or Personal Savings (FFP)
After the completion of the ideation phase money turns out being an absolute necessity to begin implementation. FFP can help through money to kick start your business. You will need to have detailed information about the technology, sales turnover, profitability, growth potential, etc. regarding your business to attract professional investors. FFP is thus a more accessible form of funding especially when you might not have all the aforementioned details because the business idea is not put through the same level of scrutiny as it would have been by professionals.
If you have saved some money, it becomes easy for you to pour your own money into your own idea. But what happens when you have no personal savings? Or when even if you did have some, it just isn’t enough?
In this case, it would be necessary to bring in your family and friends around your business idea and ask for their investment. Their involvement may sometimes require giving them personal ownership to get them on board, while at other times since they are family or friends; their help could all be in just good faith.
2. Angel Investor
No! Angel Investors do not fall from the sky. They are individuals with excess cash in hand who provide funds in the early stage of start-ups. Your business idea must have something magnetic to get them interested. They have to be won over in order to get their money by proposing your business idea to be a medium of growth and opportunities should they choose to partake.
Angel Investors bear this high risk of failing in the present because they expect higher growth or returns in the future.
They also demand a certain percentage of ownership of the company in return for their investment. Sometimes, if you get lucky, you will find angel investors in your own circle too. Usually, a big network is needed to have a meeting with an Angel Investor. One such platform that helps connect entrepreneurs with a potential network of Angel Investors in Nepal can be found here.
3. Venture Capital
Venture Capitalists invest in ideas with key differentials that have a potential trajectory of exponential growth and in companies with historic rapid growth. They provide additional capital to emerging companies that are too small to go for an Initial Public Offering (IPO).
Investors here tend to focus on extreme growth-oriented companies in their initial stages.
Additionally, these firms do not only provide funds they also give strategic assistance to the company and hold power to shape important decisions too. They pivot more towards increasing the market valuation of the company rather than generating profits in theory because their end goal involves their exit from the company by selling off their initial stake at a higher value either to the original founders or to other Venture Capitalists.
However, as profits and the market valuation for a business have a reciprocal relationship Venture Capitalist cannot disregard profits over market valuation in reality.
There are some consulting firms in Nepal that help start-ups to manage and to find investors. Some of them are:
4. Private Equity
Unlike Venture Capitals, a Private Equity avoids risky investment as they prefer companies with stable profit and choose to put money into more mature start-up companies. This means that start-ups in the ideation phase may not have access to their funds.
Private Equity firms provide growth capital to established private companies that are not listed in the stock market in exchange for ownership.
Nonetheless, they aim to exit the company by establishing its IPO which thereby lists the securities of the company in the national stock exchange.
Private Equity firms also invest relatively larger amounts of capital than Venture Capitals into a business. This becomes a possibility because Private Equity firms themselves access their funds to invest in companies they deem worthy by means of both personal equity and external debt.
Some Private Equity and investment holding companies based in Nepal are enlisted below.
5. Debt Financing
Debt financing is an expensive way of collecting funds for working capital or capital expenditure by a business because the borrowed debt must be paid back within an agreed upon period. The individual or financial institution that lends this money becomes the creditor for the business and is given the promise of repayment of the principal with added interest. Several ways of debt financing are available, some of the more common forms are issuing debentures or bonds and taking loans from banks.
The merit of debt financing is that the ownership is not shared and some tax benefits are provided to the debtor as well.
Well-established companies with stable revenue can aim for debt financing because it might be problematic to return the debt if a solid source of income is not available. It is better for a business that is high profitability and generates sufficient cashflow simply because in such a situation the company holds the capacity to afford the debt. Businesses that do not have these fundamentals should not use debt to finance their operations or growth.
6. Crowdfunding
Crowdfunding is a simple process of collecting small amounts of funds from many investors with the help of crowdfunding websites.
It is collecting fund from a crowd of people for something worthy.
Crowdfunding can be done in four different models.
· Reward Crowdfunding
In this model of crowdfunding, a crowd of people provide money in return for a reward of some sort. The rewards can be anything like intangible as well as tangible, such as a ‘thank you’ note, or a product of the company.
· Equity Crowdfunding
Investors will receive certain equity in the company for making a monetary contribution. Many individuals invest their money in exchange for part-ownership. Equity crowdfunding model has not been in practice in Nepal as it is considered illegal here.
· Debt Crowdfunding
The person making a financial contribution will receive their money back with interest in the model of debt crowdfunding. It works only for the companies with a big upfront capital.
· Donation Crowdfunding
Donors willingly donate the desired amount to an honorable cause without condition. They will receive nothing in return apart from the feeling of doing something good for societal empowerment. Organizations involved in charity work often use this model.
Many websites are available on the internet to run different sorts of the crowdfunding campaign. Some of the crowdfunding sites are given below.
· Fundly
· Kiva
7. Incubators
Incubators are not-for-profit organizations that help start-ups to make a good network with investors, mentors and other entrepreneurs pursuing similar goals.
They also provide capital to start-ups who they deem worthy or potentially profitable.
Incubators refine your idea, make it ready to launch to the market, and provide guidance in establishing a company. They also reward the impactful ideas that cover the sectors like science and technology, innovation, and green environment.
Some Nepal based incubators are cited here.
· National Incubation & Research Center
References
i. RICHARD D. HARROCH. and MIKE SULLIVAN., Dec 22, 2019. Startup Financing: 5 Key Funding Options for Your Company. Forbes
ii. ONMARKET., 2018. Crowdfunding Models Explained [online] [viewed 31 October 2020]. Available from: https://www.onmarket.com.au
