You have a brilliant business idea. You can envision how it will disrupt the industry and improve people’s lives. The passion is there. Now, you need the funds to turn this dream into reality.
Funding a startup is no easy feat, but it is critical if you want your business to succeed in the long term. How you fund your startup can impact everything from how much control you have to how quickly you can grow. Funding the wrong way can even cause your passionate startup to crash.
So, how do you secure funding while retaining control and setting your business up for growth? Here’s the inside scoop from real entrepreneurs on funding your startup correctly.
Start With Your Funds
The easiest way to fund initial startup costs is to use your own savings. This allows you to get your business off the ground while maintaining full control and no debt. Most experts suggest saving 6-12 months’ worth of living expenses before dipping into your own funds. Then, you will be able to fund your startup without having to worry too much about your financial situation.
Many entrepreneurs also turn to credit cards or loans from friends and family to help finance their business when personal savings aren’t enough. Just be cautious about taking on high-interest debt or damaging personal relationships in those early days.
Seek Crowdfunding
Once you have created prototypes and completed initial market validation, consider running a crowdfunding campaign through a site like Kickstarter or Indiegogo. Crowdfunding lets you raise smaller amounts of money from a large number of backers rather than large sums from just a few investors.
Crowdfunding campaigns help demonstrate actual demand for your product. They can be a stepping stone to securing more significant startup investments later. But be sure you have a clear plan to deliver on your campaign promises before launching one.
Apply for Small Business Grants
The government and specific organizations offer multiple grant programs to help startups get off the ground. Unlike traditional small business loans, small business grants provide funding that usually doesn’t need to be repaid.
Given the extensive application processes and stiff competition, qualifying for grants requires effort. But the time invested upfront can pay off nicely if your business is selected. Several entrepreneurs suggest hiring a grant writer to assist with applications.
Most grants for early-stage startups range from $5,000 to $25,000. However, more significant amounts are occasionally available for ideas with high growth or community impact potential.
Get Strategic With Business Plan Competitions
Business plan competitions are similar to the TV show Shark Tank. You pitch your business idea to a panel of expert judges and possibly win funds to help launch your startup. The catch is you compete against 10-100 other startups for one of just a few funding prizes.
Preparing for these competitions takes effort, but also helps refine your business strategy. Competition judges can provide invaluable feedback to improve your branding, messaging and financials. Cash prizes typically start around $10,000.
Very few startups win competitions their first time out. Expect to enter multiple competitions to gain skills, feedback, and possibly funding.
Consider Angel Investors
Angel investors are wealthy individuals willing to invest their money into young startups. This provides startup funds to keep refining products and growing the business. The catch? Angels receive an ownership stake in your company in return.
Angel investors expect to make their money back plus sizeable returns over time in exchange for taking early risks. Be selective in choosing investors that offer capital AND expertise to support your startup’s growth vs just money.
Research Venture Capital Opportunities
Venture capital firms invest substantial sums into high-potential startups planning rapid expansion. However, VCs typically don’t consider investing less than $250k to $2 million in very early-stage companies; these funds need serious scale potential to deliver the outsized returns they expect.
Know that most VCs invest in less than 1% of startups that approach them. Before pitching, it’s critical to connect with the right firm for your industry and growth stage. Expect extensive due diligence before making any funding decisions, too.
Weigh the Pros and Cons of Accelerators/Incubators
Startup accelerators and incubators speed up growth by providing workspace, expert mentors, and introductions to investors. Leading programs often invest $50k—$150k cash in participating startups. However, competition is extremely fierce to get accepted.
Understand that accepting accelerator/incubator investments means giving up additional equity, usually 5% %- 10%. Before joining a program, ensure the expertise and connections offered align with your startup’s biggest gaps and growth priorities.
Consider Revenue-Based Financing
Revenue-based financing provides debt financing based on your startup’s current revenues. Investors then take a percentage of future revenues until the funds are repaid, often over 12-24 months. This flexible form of funding works for startups with established revenue streams.
Payment percentages usually range from 5-10% until 1.5- 2.5x the investment is repaid. While more expensive than standard loans, revenue-based financing works well for startups with substantial existing revenues minus the huge equity tradeoffs.
The most important takeaway on funding your passionate startup? Avoid compromising your vision or control unless the payoff for your business is 10x the concessions. Only consider giving up equity or control if the expertise, connections, or growth potential gained significantly outweigh the costs.
Final Words
Now, you clearly know how to fund your startup correctly. All you have to do is follow these tips and keep your startup going. It will eventually help you to see the results and how you grow as a business.
Stay strategic in who you seek funding from and creative in the types of financing utilized based on your industry and stage. Following these best practices will help transform your dream into a high-growth, high-value startup poised to change the world. The only limit? How far your passion can take you.
