What is Funding? How does it work? Ask an entrepreneur and he will bombard you with complicated legal and technical terms. Ask a non-entrepreneur and you will get a simple answer: “money for my business”. Hence, in teensy terms, funding does actually mean money for your business. At least a part of it does mean that. One of the most important decisions that face a start-up is how to fund its business. In the hustle and bustle of pouring advices from all sides, a start-up often gets into a hasty mess. Far from helping the start-up, these hasty and untimely decision leads to the inconveniences and sometimes even closure and scams. In this section, we aim to brush you through the “Basics of Start-Up Funding: Part I” –What and How to Do?  

WHAT IS START-UP CAPITAL?

Simply put-“the money required for starting your business.” The expenses for starting up a business may range from obtaining your office permit to managing development and marketing expenses. This capital is also commonly known as “Seed Money”. The requirement of seed capital depends on the nature of the start-up. For example, a venture with a lower risk profile will require lesser amount of seed capital and vice versa. The sources of funding the seed capital can be from personal sources of funds of the entrepreneurs, loans from bank and financial institutions, venture capital funds or angel funds. So, how exactly do we decide that which form of funding is best suited for our venture? There is no specific answer to that.

SOURCES OF START-UP FUNDING:

1) Bootstrapping:

Bootstrapping means funding the business entirely on the basis of entrepreneur’s personal assets and venture’s own cash flow. Bootstrapping is one of most effective and inexpensive ways to ensure a business’ positive cash flow. It reduces the dependency on external sources of finance, especially on debt capital. This form of funding is best suitable for ventures with high risk tolerance, high net worth, and low risk profile.

2) Crowdfunding:

Crowdfunding is one concept that has been attracting a lot of attention these days. It is being considered as one of the basic sources of start-up funding. Crowdfunding refers to the concept of pulling small amounts of money from a large number of individuals. It basically means making use of the “crowd” to “fund” your venture. It makes the use of widespread network of friends, family, colleagues through social media like Facebook, Twitter, LinkedIn, Google+, etc. Crowdfunding has the potential to increase entrepreneurship by expanding the pool of investors from whom funds can be raised beyond the traditional circle of owners, relatives andventure capitalists. In countries like US, Crowdfunding is restricted by regulations on who is allowed to fund a new business and how much they are allowed to contribute. This restriction is aimed to provide a cushion to the non-wealthy investors from putting too much of their hard earned money at stake. In this form of finance, there is no equity is exchanged.  Hence, there is no cut up in the start-up’s slice of pie. It is mostly suitable for products and services with a ready market and mass appeal.

3) Accelerators and Incubators:

One of the best options of funding is probably to be part of an accelerator, incubator or other programs that assist in launching of start-ups. In addition to being a wonderful networking opportunity, most programs provide funding to the funders in exchange of an equity stake in the start-up. The added advantage in these fundings is the flow of technical knowhow and mentorship. There are also specific programs which are dedicated towards women entrepreneur. This type of funding is best suited for start-ups with high potential growth looking to gain access to a network of mentors and capital.

4) Angels

Remember the days when mother used to whisper: “sleep tight, angels are guiding you”. Well, here you go!! You have angels or group of angels for your new born start-ups. Angel investors are mainly a class of wealthy investors giving the founders initial capital to launch their business. However, these are the days that have seen the transition of “Apple” and “Blackberry” from mere fruits to You-Know-What! Hence, you cannot really expect to be the investors to be “Angels” in the real sense. They invest their capital into the start-ups in exchange of equity stake in the venture. Also, these are high risk investments since there is very high probability of the start-ups to fail or lag behind in initial years. Angel investing is high risk because of the high rate of failure for new ventures. Angel investors also assume the risk of their investment being diluted by future rounds of financing at higher valuations of the company. For these reasons, they will be looking for the potential of a high rate of return when they decide where to allocate their funds and whether to invest in a specific venture. Angel investors can function independently or they can be part of a group or network. This type of funding is suitable for high growth start-ups that need initial seed capital or early stage capital to accelerate traction and those who look up to acquire money and also mentorship.

5) Venture Capitalists:

Just like angel funders, venture capitalists also look for an appropriate equity position which is likely to give them a high rate of return to compensate their risk. They are mostly professional investors looking for significant returns. Venture capital funds can specialize in a certain industries or sectors, or certain types of companies or business models. This mode of funding is best suited for start-ups with significant traction and looking for massive   growth and do not hesitate dishing out its equity stake.

6) Banks and Financial Institutions:

Another traditional source of finance is banks and financial institutions. But, we have left these out owing to complications relating to it. Banks are highly regulated and need both collateral and a clear repayment path in order to provide a loan.  Hence, it is not a very feasible source of funding for any start-up. To conclude, these are the basics of start-up funding summarized. In the next part, we would enumerate the factors that you should keep in mind while deciding on the mode of funding. So, stay tuned!!! To start-up your own business, please visit: Company Registration