It’s our 9th article from the “Startup series”, and today we will talk about the types of fundraising for startups. Here are previous ones, so if you have passed them through – it could be also interesting, so you are welcome to check them too:
As we mentioned in the article “What is startup capital?”, the first problem every startup founder faces is finding the first capital. Let’s take a look at 15 ways of solving this issue.
1. Find a startup team and inspire them to work for the future profit
We mean, the near future in which your product or business will go up rapidly and all participants will receive not only earned but also bonuses.
Risk: the business will not skyrocket or the effect will not be as powerful as expected, and the team or part of it may leave the project.
2. Get the bank loan for a new startup business
To do this type of fundraising for a startup, you need to prepare a fully thought out and calculated business plan. In addition, you need to register as at least an individual entrepreneur or a limited liability company. In practice, firms or individual entrepreneurs registered fewer than six months ago are not getting lend at all.
Bank loans are intended which means that money can be spent only for certain purposes. Most often this is the purchase of materials, equipment, or other material things. The bank will definitely check what the sum was spent on.
Additionally, the bank may ask to provide security in the form of a pledge or personal surety. The pledge is more attractive for the bank since it can be assessed, there are understood risks, and the possibility of implementation in case of non-repayment of the loan.
What banks consider as collateral: cars, residential, and non-residential real estate. You need to prepare for the costs: make an assessment (at your expense) and ensure the object. The bank may request a guarantor. You can be the guarantor yourself or ask a friend or a relative, as well as a professional company.
3. Obtain a consumer loan as an individual
Everything is quite simple here: go to the bank and get a consumer loan. If you do not have an official job and cannot offer the pledge, then the likelihood of obtaining a loan is reduced, but not excluded. Perhaps a small amount will be approved. This also applies to the registration of a credit card – quite simple but the amount is small. Perhaps this is enough for you to begin with.
4. Get a loan from a pawnshop
This type of fundraising for a startup requires the pledge because pawnshops and car pawnshops work only on bail. Pawnshops take gold, antiques, appliances, and other household appliances. The amounts are small, the interest is higher than the banking one. Car pawnshops specialize only in cars, and the loan amount reaches 70-80% of the cost of the car. The advantage is speed. The disadvantage is that the percentage is higher than the banking one. Calculate the entire financial part before taking out such a loan.
5. A loan from fund to help entrepreneurs
We separated this kind of loan from the other types of fundraising for Startups since it is public money which means a completely civilized relationship. For registration, you will need to organize a company: LLC or individual entrepreneur or have an operating company with a registration period of no more than 12 months. Provide the entire package of documents and receive an intended loan. Here is what you can spend that kind of money on:
- Purchase of goods for sale, replenishment of working capital.
- Purchase / lease / renovation of commercial real estate.
- Purchase/rental of commercial vehicles.
- Purchase of equipment and materials.
- Refinancing business loans.
A big advantage is the possibility of postponement, that is, having received a loan, you can start paying for it after a while. It all depends on the conditions. This is usually two to four months. Such a foundation can be a guarantor for a bank loan.
6. Get a grant
Various foundations, including state ones, help entrepreneurs and provide cash grants. The money must be reported, but it is not necessary to return it (subject to the intended purpose). As an example, you could check the federal grant-making agencies page.
7. Receive subsidies from the state
Here we are not talking about loans and credits from the state, but about real financial assistance. The state through employment services or funds for assistance to entrepreneurs provides financial assistance. However, a business plan is needed.
8. Borrow from family, friends, and acquaintances
Maybe this is the first thing that comes to mind. You can borrow from your parents, and if something does not work out for you, the parents are the parents, they will support you, and the financial question will be decided later. But it is better not to work with friends and acquaintances or distant relatives. Use this option as your last option.
9. Attract an investor
You have an idea, maybe a business plan and a team. Try to search for an investor online, or contact specialized companies. There they will provide support, and possibly find funding and even a team. You need to prepare that here you are an employee and constantly report to the investor. Formally, you borrow money and mortgage your business.
10. Use crowd investing
Crowdinvesting (equity crowdfunding) is an alternative financial tool for attracting capital to startups and small businesses from a wide range of micro investors. Something similar to finding and attracting an investor, with minor differences. The main idea is investors get a share in the capital of the company and the risk of loss of investment.
11. Attract a partner
Find a partner or pool of partners with whom you jointly own the business and share the profit proportionately. It is vital to mention this type of fundraising for a startup: if you have only ideas and no other investments, it will be quite difficult to find a partner, since everything will rest on the idea and on you. And in case of your unwillingness to work or leave, you simply leave, and your idea is burned out, and your partner incurs losses. Therefore, it is better with the idea to contribute property or money to a common enterprise, then the partner will be more confident in your mood.
12. Attract a partner “for free”
There is even such an overseas term – crowdsourcing – attracting a wide range of people to use their creativity, knowledge, and experience in the form of subcontracting work on a voluntary basis. All the work is done by unpaid or low-paid amateur professionals who spend their free time on a project. The most famous example of crowdsourcing is the Wikipedia encyclopedia.
13. Angel investors “near me”
Usually, angel investors are people with good wealth who seek opportunities to invest relatively small money into startups. Most often the sum ranges from a few thousand dollars to a million dollars in the US. Angel investors are huge contributors to the fundraising ecosystem as one of the easiest ways to get investment for an early-stage startup.
In addition, angel investors often have strong expertise in a certain domain and tend to support projects in the same area. It results in more efficient negotiations and networking help founders can get.
14. Work in parallel and invest your own funds
According to this type of fundraising startup, you are still working, which means that you do not devote all your time to a new business/project and you have a small financial airbag in the form of the wage at your current place. At the initial stage, this option will work, but for growth, you need to devote all the time to your project. You won’t be able to sit on two chairs. It’s up to you to decide.
15. Crowdfunding – as a type of fundraising for small startups
Ten years ago, a new tool for raising capital appeared on the Internet – crowdfunding. Crowdfunding is a type of fundraising for the purpose of financing a specific project from anyone. Those who raise money are called recipients, and those who donate are called donors, sponsors, or investors.
The recipient must propose a business idea, determine the required amount of money and the deadline for its collection, calculate all costs, announce the conditions for donors (gratuitous funding, funding in exchange for intangible gratitude, funding in exchange for a share of future profits) and put up his proposal for the crowdfunding platform. A business idea should not contradict the laws of the state. Information regarding the progress of fundraising should be open to everyone, and the collected money can only be used for the stated purposes.
For a startup, a crowdfunding campaign is not only a way to get funding, but also a chance to draw attention to a business idea, which increases the startup’s chances of getting into the sphere of interests of business angels, large investors, business incubators, and accelerators. The main components of a successful crowdfunding campaign are marketing and PR.
In this article, we tried to explain the main types of fundraising for startups so the founders can get a clear vision of available options. We can robustly group the listed types in the ones that require partnering on almost equal business rights, the ones that require structured documentation of the project and/or some property to pledge in order to get loans or grants, and the ones where you fund your project by yourself or find investors. In the end, it’s up to the entrepreneur to decide which type of fundraising for startups works best for them.