Funding a Start-Up From the Perspective of a Complete Rookie
“Where’s the money coming from?”
The universal question on the lips of Start-up companies everywhere. Funding a Start-up can be daunting and might seem downright impossible, and choosing a sustainable, realistic way of keeping a business afloat is undoubtably one of the trickiest decisions any entrepreneur will have to make. However, there might be more options than you are aware of, and hopefully this article can shed some light on the options entrepreneurs have when looking to pursue their business dreams.
Going for a Grant
A government grant is kind of a gold mine for any start up looking to boost their cash flow. Just some of the objectives of any government is to minimise unemployment, reduce trade deficits and to encourage growth, so, if your Start-Up shows potential to boost local employment and generate sales, your national or local government might be willing to fork out some much needed cash to help start growing and developing your ideas. The competition for these grants is understandably very high but are worth pursuing, nonetheless.
VC’s and Angel investors
If you’re looking for more than offered by the government, one way to acquire significantly more capital is to approach a Venture Capitalist or Angel Investor. Even if you are a rookie like myself, you may have heard of Venture capitalists from the extremely popular mobile game “AdVenture Capitalist” in which players build their own personal, fantasy corporate empire, and fittingly, Kongregate, the developer of the game achieved much success on the back of investments from Venture Capitalists such as Reid Hoffman and Jeff Bezos. Angel investors are individuals with a wealth of disposable capital which they aim to provide to Start-Ups and tend to demand convertible debt or ownership equity in return. Angel investors can be ideal for especially new Start-Ups as they usually invest when the risk of failure is quite high where other investors would likely be reluctant to invest. Similarly, Venture Capitalists invest in young businesses which have the potential to grow and thrive or have already demonstrated their ability to do so, in exchange for equity or an ownership stake. In both cases, such investment can not only just be financially useful, but Start-Ups can also benefit from expert advice which such individuals can give as a result of their significant knowledge and experience gained from being successful entrepreneurs themselves.
“Worrying is a misuse of your imagination and would it would be infinitely more productive to grow and develop your ideas and turning them into success stories.”
The power of the internet
One method of funding which has had a meteoric rise in popularity is Crowdfunding. Crowdfunding is practically the opposite of a Venture Capitalist. Whereas VC’s provide large sums of capital and comes from a single individual, Crowdfunding involves funding project through small investments from a large amount of people. Many crowdfunding sites are starting to become household names with sites such as Kickstarter and GoFundMe being extremely popular and raising significant amounts of capital. For example, in 2015, over $34 million was raised through crowdfunding. There are essentially three different types of crowdfunding: Donation-based, equity crowdfunding and debt crowdfunding. Donation based crowdfunding is when the business doesn’t give anything in exchange for the capital they receive. However, many do include incentives to encourage donations such as giving donators early access to products or sneak peaks into new content. On the other hand, within debt and equity crowdfunding, businesses, like with conventional investments, exchange stocks or repay loans in monthly instalments in exchange for capital. Like with venture capitalist investment, the benefits of crowdfunding go beyond its monetary gains, as it can help with growing the brand of the business by creating a buzz around companies which are heavily invested in.
Conclusion
Whilst all the options I mentioned have their pros and cons, it is important to recognise which one is best suited depending on the stage that the Start-Up is in. For instance, very new businesses may like to use a combination of methods to boost their early development whereas slightly more developed Start-Ups might opt for VC’s as they tend to only invest in deals worth more than one million as VC investment deals take quite a lot of time to broker. What I’d say is most important though, is going for the option which you are most comfortable and confident with so that you don’t spend all your time worrying about money. Worrying is a misuse of your imagination and would it would be infinitely more productive to grow and develop your ideas and turning them into success stories.
This article was written by Charlie Pavlicic, an intern at Capital Enterprise as part of The Diana Award programme.
