How to find a funding source for a startup?
Karolina Walczewska, 30 September 2020
These days, there is a wide range of possibilities when it comes to startup funding. Actively searching is a key to success, as is proper preparation. More about this issue is explained in our article What to prepare before meeting the startup investor? If one of the funding sources fails, try to obtain money from elsewhere. Risk mitigation encourages a type of funding that includes multiple sources, benefitting the applicant in case of some failure. Each search should establish criteria that meet its expectations or, at least, pursue the most straightforward solution. There are a few options. This article will introduce and also precisely describe available options for startup funding sources.
Sources of funding
1. External investors
Looking for an external investor is the first way to acquire some money for the startup. Except for the financial contribution, investors often help a given company to enter into the business world, establish some contacts and experience. Bear in mind that the person who invests is not a passive observer but a business partner. Since the investor has made a cash contribution to the business, partial control and influence over the operation of the company are expected, in return. Good cooperation with external investors is a key to success. Think about such a person as a business partner whose thoughts you take into account, and not as a person who is only there to spend money. There are many ways to attract an external investor, including:
- Venture capital - a type of external investment for small and medium-sized enterprises, in which the investor (most often a large enterprise) contributes money to the company by buying shares or stocks. Such a person becomes a co-owner of the startup, financially supports the project, also engages in the decision-making process, and might even manage work. What is more, the contract is concluded for a strictly defined period of time, so the startup owner has no fear of losing money overnight.
- Business angels - this investing method involves only investments from someone’s own funds. Business Angels are private investors who are eagerly looking for innovative enterprises. They hope to earn profits from shares in a startup for help in the form of a financial contribution.
- Investment funds - a form of startup financing based on the collective investment of funds contributed by fund participants. These funds are then invested in the company's securities, and the profits come mainly from the change in their value.
- Bond issue - an alternative solution to search for sources of financing from external investors. This method mainly applies to startups that look for significant cash. It consists of the issuing of securities (bonds) with a specific value. To put it simply, it is a kind of loan in which we undertake to provide a specific benefit to the bond owner (investor), which may be in cash or in kind. In the case of the first option, the investor has the right to return the amount borrowed together with interest. However, the non-monetary option is the right to obtain certain rights, e.g. to participate in the company's future profits.
Crowdfunding is a fairly new way to raise funds, now becoming increasingly popular. It is about introducing and presenting the project to a wider community through an online platform. Through such a platform, people interested in the project can make small, one-off payments for its support. In return for a financial contribution, many "investors" are rewarded with a share of the future profits of the project, or become co-owners of the project. This type of benefit exchange is a form of investment. However, the investor can be also compensated for contribution by a pre-sale of the finished product.
This way of funding opens possibilities to reach a wide audience thanks to the popularity of such platforms. Additionally, the person looking for cash gets a clear message about whether their project is interesting and innovative enough to enter the market. The most popular crowdfunding platforms include kickstarter.com or indiegogo.com, created around 2008/2009.
3. European Union Funds
The European Union offers financial help to fledgling entrepreneurs as part of various projects. Many types of loans are available for the small and medium-sized enterprise sector for the purchase of equipment, for example. However, it should be remembered that this form of financing is repaid. However, getting it is much easier than a bank loan, which is why so many companies use it.
People looking for grants to finance their startup should be interested in one of those funding programs, most of which usually require a significantly high contribution. One of them is the Horizon 2020 project. In short, it is a competition in which money is awarded in the form of subsidies or reimbursement of costs that have already been incurred.
4. Bank loans
Bank loans with an interest rate are another solution for your startup needs, especially when you are looking for funding for small and medium-sized businesses. All banks offer various loans with different advantages. Be sure to choose the one that is the most personalized and customized to you. Unfortunately, a good idea isn't enough. It has to be backed up with solid preparation, including a business plan. Moreover, bank loans are usually available only for those who have some credit capacity based on company assets that can secure the loan. Make sure that you've done good research looking through bank proposals, go deeply through all requirements and credit arrangements, and also, always consult with a lawyer.
5. Small Business Credit Cards
Credits Cards for small businesses became popular in the USA because of the convenient and quick way they enabled cash-hungry businesses to obtain some money. It is also an alternative solution to traditional bank loans. Those cards allow to make purchases and withdraw cash. Small Business Credit Cards, like regular consumer credit cards, involve an interest charge when the owner doesn't repay the balance in full each billing cycle. It is possible to apply for such a card both online or in a bank. Nowadays, you can even compare available options for credit cards. Such convenient solutions, for example, can be found here. This type of loan can be useful in the vast majority of cases to finance short-term needs like some new equipment, but most importantly to fund the development of the product, itself.
As you can see, there are certainly many sources of funding and thus help in implementing a startup. Everyone should find something suitable for their business plan and assumptions. You can use one option or several. The choice is up to the startup. You need only strong determination, because, as you know, many options are burdened with requirements and many conditions that must be met. Good luck!