Funding is the money provided by an organization for a particular purpose. It is fairly common for a fresh business idea or a startup company to lack financial resources. In this article, you will be learning ways by which you can fund your startup business idea. This article is also for you if you have an already existing business and are looking for ways to fund it.
Whether your company is in the early stages of development or is expanding, it needs essential resources. Certain fixed and variable expenditures must be incurred for your company to function.
A startup may have the capacity to cover its working capital expenses with its own funds. Still, it will likely need a large sum to purchase equipment and other raw materials, website and product development, marketing, advertising, obtaining office space, hiring a team, and other expenses.
As a result, the founders may need to seek external finance if their internal resources are insufficient. The founders can use both internal and external funding to expand their business.
Now, let’s look at some of the various funding options available for funding your business.
How to Find Funding for Your Business
This depends on several factors; the method you want to use must be tailored to the company’s requirements. Where and how you hunt for money is determined by your organization and the type of money you require.
For example, a high-growth internet-related company seeking second-round venture capital and a small retail store wanting to open a second location require distinct types of financing.
Angel investors, venture capitalists, banks, private investors, and the government can all help with startup funding.
Some of the funding alternatives available include, but are not limited to:
- Bootstrapping
When first getting started, many entrepreneurs employ the bootstrapping method, which means funding your company by pulling together any personal funds you can find. Your savings account, credit cards, and any home equity lines of credit are often included.
When starting a firm, your first investor should be you—either with your own money or with assets as collateral. This demonstrates to investors and bankers that you are committed to your project for the long term and willing to accept risks.
- Love money
Love money is the money that has been loaned/given to you by your spouse, parents, family, or friends. It is referred to by investors and bankers as “patient capital,” or money that will be repaid when your company’s profits rise.
Friends and family are frequently the primary sources of finance for entrepreneurs following private funding. Before pursuing external money, this may be the cheapest and most flexible option.
- Venture capital
The most well-known and wanted startup investors are VCs. They bring funds in for larger and later rounds before a company reaches maturity.
Venture capitalists are searching for technology-driven firms and companies with solid growth potential.
This is a very competitive area that will necessitate the development of strong relationships and a good pitch deck and pitch.
- Banks
Banks are less likely to invest in or lend money to startup companies than venture capitalists. However, if you have an established small enterprise, you can consider banks as they will most likely fund you.
- Angel investment
This type of funding is significantly more frequent than venture capital, and it is usually much more accessible to startups, especially during the earlier phases of growth.
Although angel investment resembles venture capital (and is frequently mistaken with it), fundamental differences exist.
Angel investors are typically wealthy individuals or retired executives who maintain low profiles. They make direct investments in small businesses controlled by others. They are frequently industry leaders who provide their experience and network of contacts and technical and/or management expertise.
Angel investors often invest between $25,000 and $100,000. In the order of $1,000,000, Larger investments are preferred by institutional venture capitalists.
- Startup incubators
Business incubators (also known as “accelerators”) specialize in the high-tech industry, providing assistance to startups at various phases of development.
The incubation period can take up to two years in most cases. When the product is ready, the company typically leaves the incubator’s grounds and goes into industrial production on its own.
- Prizes from competitions
Most successful startups have got fundings through business school or coding competitions.
Even if the prizes don’t provide a lot of money, they look excellent on your pitch deck and fundraising materials.
- Crowdfunding platforms
While crowdfunding platforms are not new, they have benefited entrepreneurs in various ways. Whether it’s based on a contribution, debt, or stock, this might be a terrific way to raise money in smaller quantities from a larger number of participants.
If done correctly, it also has other advantages. It can attract a large number of brand advocates and referral sources. It can assist you in gaining press attention and brand exposure while also distributing your early product.
- Government grants and subsidies
Government authorities may be able to help your company with funding in the form of grants and subsidies.
Grants can be difficult to come by. There may be stiff competition, and award requirements are frequently strict. Most grants require you to match the monies you are granted, and the amount you must reach varies substantially depending on the grantor.
Other Categories
One or more of the above ways of funding can be a source of any of these funding round;
- Pre-seed
The pre-seed funding relates to when the founders of a company are just getting their operations off the ground. The founders and close friends, supporters, and family are the most prevalent “pre-seed” funders.
This fundraising stage might happen quickly or take a long time, depending on the nature of the firm and the early costs associated with establishing the business idea. In 2019, Kuda Bank raised $1.6m in pre-seed funding.
- Seed
Seed capital is the first round of traditional equity financing. It is usually the first official money raised by a commercial endeavor or enterprise. Some businesses never progress beyond seed investment to Series A or beyond.
In a seed fundraising situation, potential investors include entrepreneurs, friends, family, incubators, venture capitalists, angel investors, and many others.
The majority of seed-stage enterprises are worth between $3 million and $6 million. The Nigeria Mobility-as-a-Service (MaaS) firm, Treepz, has recently raised $2.8 million to expand into East Africa in a seed round.
- Series A
Once a company has established a track record (e.g., a large user base, steady revenue, or other critical performance indicators), it may choose Series A to further optimize its user base and product offerings.
Firms undergoing Series A investment rounds are frequently valued at around $23 million.
Angel investors may invest at this stage, but they have far less clout in this investment round than they did in the seed round.
Africa Health Holdings, a healthcare startup, secured $18 million in Series A funding.
- Series B
Series B rounds help push businesses past the development stage and into the next phase. Investors assist startups in reaching their goals by expanding their market reach.
Companies that have gone through seed and Series A investment rounds have previously built significant user bases and demonstrated to investors that they are ready for larger-scale success.
The company will need Series B capital to expand to satisfy these demand levels. The average anticipated capital raised is $33 million in a Series B round.
Series B differs from Series A in that it includes a new wave of venture capital firms specializing in later-stage investing.
Ozow, a South African payment gateway, raised $48 million in a Series B fundraising round to expand the country’s alternative payment options.
- Series C
Businesses that make it to the Series C fundraising round are already doing well. These businesses seek additional capital to help them develop new products, grow into new markets, or even buy other companies.
Series C finance aims to scale businesses and help them grow swiftly. Companies that pursue Series D capital do so either as a final push before an IPO or because they are yet to reach the aim they set out to achieve with Series C funding.
Some businesses can even go on to receive Series E capital. In July 2021, South African payments and software startup Yoco secured $83 million in Series C funding to accelerate the development of its platform and expand internationally. Also, Andela raised a $100 million Series D round in 2019 and $200 million Series E funding in 2021.
Things to Consider before Taking on Business Funding
Do not spend any money without first conducting legal research. Hire a professional to do the paperwork, and double-check that everything is signed. Put it all down on paper.
Don’t spend money until you have received it. Never spend money on something that was promised but not yet delivered.
Frequently, businesses receive financial commitments and enter into contracts for expenses, only to have the funding fall through. Lastly, ensure you do all due diligence and ask questions from similar companies.
Conclusion
Whether or not your business will seek funding, it is imperative that the first funding is from you as the founder. After that, you can draft plans on other sources of funding you might need.
The funding your startup seeks depends on the type of your company, your needs, and the stage you are in. Pre-seed to Series C are the most common types of seed funding; only a few companies get to series E.
Some other funding sources include angel investors, venture capitalists, banks, government grants, prizes from competitions.
