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5 Methods of Funding Your Startup

Funding

5 Methods of Funding Your Startup

Raising the capital necessary to establish and scale a startup is one of the many defining hurdles in the startup journey. Capital is the grease in the cogs that keep your startup moving. Without it, and without enough of it, your startup’s expansion will ground to a halt.

As the startup ecosystem has evolved, so have the options for funding these typically high-risk ventures. In Australia, there are a number of grants available to help Startups and Small Businesses get off the ground, but these cash injections can dry up quickly.

Sustained funding is often necessary. With the right pitch, data and idea, it’s easier than it has ever been to find a reliable capital source to get you over the ongoing challenges of your journey. Let’s learn about some of the funding options that are available today.

Bootstrapping

Bootstrapping is the process of using one’s own personal capital to fund a startup venture. Given the funds are coming from the founder’s own savings, there’s no need to pitch or to spend time creating monthly or quarterly investor reports. This saves time and is undoubtedly the easiest and most flexible option.

The downside is that the founders own financial livelihood is on the line, adding to the already stressful day-to-day life the entrepreneur. In addition to the stress, the typical founder may not have a large pool of personal wealth, and so bootstrapping can limit the potential cashflow for the business and stagnate growth.

Bootstrapping is arguably a good way to finance the development of a Minimal Viable Product. It gives the founders an early product that they can use to pitch for more funding post-MVP.

Equity Crowdfunding

Crowdfunding is the process of raising small sums of money from a large amount of people. The traditional reward for Crowdfunding was an early version of a fundraiser’s product or a gift. Equity Crowdfunding on the other hand rewards the investor with a small equity stake in the business.

Unlike Bootstrapping, Equity Crowdfunding means that the founders have to part way with some of the equity they hold in the business. In return they can expect to receive significant funding from a diverse pool of investors.

This form of capital raising involves the need for a clever and appealing pitch. The pitch will need to instill a sense of confidence in a large number of investors. This is unlike most of the other capital raising methods which involve a smaller pool of potential investors. In these cases, your pitch can be far more tailored to the specific needs of the investors themselves.

Angel Investors

Angel Investors are typically individual entrepreneurs who have a high-net-worth. They are looking to invest some of their excess cash in ventures that they feel confident will provide a worthwhile return on their investment. They are often also looking to get involved in businesses that complement their existing holdings.

This form of investor will receive equity in return for their investment. They are typically knowledgeable in the area that they’re investing. They are also interested in sharing their knowledge to help drive the business to success. This can make them a particularly valuable investor, yet at the same time can mean the founders may lose some control.

Accelerators

A Startup Accelerator is a fixed-term program that provides Startups with seed investment, mentorship, networking, education and collaboration. Competition to join Accelerator programs is typically fierce, and qualification requirements can be demanding. But the reward for being part of one of these programs can give a Startup all it needs to survive and thrive.

Accelerators will expect to take an equity stake in the Startups that they admit to their program. Sometimes this stake can be large.

One of the draw-cards of joining an Accelerator as opposed to pursuing other funding options is the network. Joining an Accelerator who specialises in the same sector can mean a Startup will be able to learn from the other Startups in the same ecosystem. This can have profound and mutual benefits for all parties involved.

Venture Capital

Venture Capital is a form of private equity that is invested into small businesses and startups that are deemed to have the potential for high growth. Venture Capital funds are pooled investment vehicles, and are set up to take on investments that are considered too risky for standard capital markets and bank loans.

As with most of the other funding options, Venture Capital funds take an equity stake in the business. If the business succeeds in gaining traction, the fund will receive a return on their investment – and sometimes this return will be great.

One of the appeals of the Venture Capital form of funding is the potential size of investment. These funds typically have the largest pool of capital available to invest. After an initial “seed funding” round, further rounds of funding can be acquired; Series A, Series B, Series C and so on.

Summing Up

As the potential for capital gains increases alongside the rise of the Startup phenomenon, so do the number of funding options available for early-stage Startups. From the self-backing style of Bootstrapping, to the well-resourced appeal of Venture Capital. There are funding options to suit all forms of Startups.

The best option will depend on the specific requirements of your Startup. You may have the need for a large team, expensive equipment and a formidable marketing budget early on, or you may not. If you don’t need to borrow, then hold on to your equity for as long as you can!

Daniel Boterhoven

Director and Lead Dev @ViewportTech. I create cool #tech for the web, mobile and desktop.

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