What funding options are available to entrepreneurs?
Great, so you think you've a good reason to raise funds.
Next step is to understand sources of funding so you can prepare a fundraising strategy that suits your requirements. Usually when an entrepreneur thinks about fundraising their primary focus is on VCs and angels but that's not a true reflection of the landscape. Here's a comprehensive list of all funding sources that you may consider.
Friends and Family
When you're just getting started and don't have solid investor connects, it's advisable to tap into your existing network to get your idea off the ground. There are definitely some pros and cons of this approach but in the absence of other options, this could be a winning strategy. Here are some great resources on this topic.
Incubators and Accelerators
There are 1000+ incubators and accelerators around the world. They are perhaps one of the most important cogs in the entrepreneurial ecosystem. Incubators and accelerators not only provide much needed capital boost but also offer ongoing mentorship on various areas of a startup's business.
They typically follow a location-based, fixed duration (3-6 months) program structure to help startups. Although most of them seem focused on fundraising and pitching activities.
Getting early into an incubation program might be one of the best things that can happen to your business. With proven resources and hand on advice entrepreneurs can avoid making mistakes and save tons of time doing unnecessary things.
VCs are the superstars of the fundraising game. They can make or break a startup's dreams with their stamp of approval (or rejection!). There are thousands of small and large funds across the world that invest from pre-seed to pre-IPO. In return of providing money VCs take an equity stake in your company with preferred voting and liquidation rights.
VCs are in the game of backing scalable businesses that can address billion $+ market sizes. If you're running a lifestyle business and aim to stay small size this option may not be the right fit for you.
Most of the world's leading VC are based out of Silicon Valley, over the last few years raising capital has become easier for smart, passionate teams.
Angels are high net worth individuals with sound professional operating experience in startups and/or big companies. Most angels typically write a small check size ($10000-$50000). Some super angels are well connected and have great reputation in the startup ecosystem. Getting such angels on board can be really helpful for startup from non-financial reasons.
Similar to VCs, angels also take ownership in your company.
Income Sharing Agreements
ISAs have been a relatively new source of financing for startups especially who're already earning decent monthly revenue. ISAs offer all the benefits of equity based financing without diluting o giving up any stake in the company.
In an ISA (or revenue based financing) an investor simply takes a small % of your monthly income in return for providing investment. Unlike loans, there's no obligation on founders or businesses to pay a fixed amount every month for a limited time period or until a cap is reached (usually 1.25x of amount invested). Only if a business makes more than a certain $ in a given month money is paid out otherwise investors get nothing.
This arrangement makes sure both founders' and investors' are aligned.
Sometimes a larger company in the same space as yours may be looking to make investment in smaller startups. This helps them become part of the innovation instead of fighting them and stay on top of latest trends in the industry.
They can even end up acquiring the startup at a later stage if there's a synergy.
Initial token offerings / Security token offerings
Another emerging infamous trend is focused on ICOs/STOs. Ever since Ethereum's successful ICO in 2015 lot of blockchain/crypto startups have gone down this route to raise funds directly from retail investors by offering unregistered securities in the company. Naturally this seemingly scammy practice has come under deep scrutiny of legal enforcement agencies across the world.
After a series of ICOs in 2017-18 we've seen this trend more or less vanish due to legal implications.
Popularized by sites like Kickstarter, Indiegogo, GoFundme etc., crowdfunding campaigns are good for companies that are building products for end users. By offering pre sales discounts and offers, entrepreneurs can not only test market appetite for what they're building but also raise some upfront capital to build and market the product.
There are other platforms like StartEngine, Republic, SeedInvest etc. where you sell equity in your business to retail investors through crowdfunding campaigns.
Many governments around the world encourage entrepreneurs to build businesses. They offer tons of resources and some seed capital as grant to promising entrepreneurs. Most grant programs don't take any equity in the company.
Banks and financial institutions
Banks typically provide interest based loans to small businesses against some repayment guarantee.
I'd personally never advice entrepreneurs to go down this path but lot of founders have stretched limits on their credit cards to meet their business expenses. Unless you are confident that you can make up for it soon through some means it's a very risky and potentially devastating option for lot of less savvy entrepreneurs.
If you've an existing audience that already likes your work, you can always request them to donate some amount to help you bring your idea to fruition.