Finding Funding as an Early Startup
Money matters can make your break a business idea.
One of the most difficult parts of any startup is finding the funds to get launched, and if you don’t have any, you will probably need outside sources.
An entrepreneur should be clear about whether his company has an investment profile. No matter how viable a bakery is, for example, it is probably not as profitable as an investor would expect to find. An investor is looking for scalable companies, which can give exponential growth and whose valuation increases rapidly to ensure the success of their investment.
In any case, the objective of this article is not to know what are the reasons that lead an investor to invest or not in a company. In this article we will see what are the different types of investments that we can access at the different stages of our company.
The first investment that a startup should get is from the founding partners themselves. An entrepreneur cannot expect others to be confident of lending their money to the project if they have not done so themselves previously. It is difficult to get investment in a company if you have not previously invested in it.
Founders who invest heavily in their idea will not only make potential future investors more confident about the project but will also keep a higher percentage of shares in the company.
Friends, family & anyone else
Many entrepreneurs, in the initial phase of their projects, have difficulties raising capital professionally with business angels or venture capital funds: sometimes due to a lack of contacts and sometimes because the project is still very green. Seeking this sort of investment is a way to get a little more gasoline for the project in these cases.
Family, friends, co-workers and all those people around us who trust us and our idea will be able to participate in this round. Furthermore, the capital raised in this way is a way of giving even more credibility to the project. If family and friends do not trust to invest in it, why should professional investors?
Loan or line of credit
Banks and savings banks normally make money available to companies if the following conditions are met: The company has a good credit history and demonstrates its economic viability or the entrepreneur is willing to back the loan in case of default with his own resources. Normally in the case of entrepreneurial projects, the second option is the most common as the company has not had time to build up this good record or to demonstrate its potential with numbers. It is difficult to sell the idea to banks beyond the data you can present with numbers.
Grants and soft loans
In many countries, both public and private bodies offer subsidies and credit lines with advantageous conditions to encourage the creation of new businesses. These entities have certain funds that they must distribute through a competition to determine which projects are the most viable.
Normally, to access these credit lines, the startup must meet certain requirements and conditions and must present a business plan that will be evaluated by a committee.
The characteristics of these soft loans are ideal for entrepreneurs since they often offer shortages and low interest rates, although in return they require a lot of work and paperwork for processing.
Equity crowdfunding (Peer-to-Peer)
Equity crowdfunding is an investment system that allows many small individual investors to participate in an investment round in exchange for a percentage of the shares in the fund. Normally these rounds take place in the initial phases of the project and are a way of democratizing the investment to potential small investors who otherwise could not have participated. You’re looking at the range of investment between $100 to $10,000 with this type of funding, to keep your expectations realistic.
This collective financing formula offers shares in exchange for money, unlike traditional crowdfunding which offers rewards. Crowd-equity campaigns are usually carried out through specialized platforms, which are in charge of giving exposure to the project, managing payments and syndicating the investment in exchange for a percentage or a fixed fee.
Investing in a company through equity crowdfunding is still a somewhat novel strategy but in recent years it has begun to become popular and is producing very good results.