5 Ways Start-Ups Raise Money
Money is the bloodline that keeps any business running. According to recent studies, over 90% of new start-ups fail within their first year of operation. Most start-up founders cite insufficient capital as the primary cause for their failure.
For most entrepreneurs, consolidating the necessary funds and resources needed to transform their ideas into businesses is often an arduous task that takes longer than expected. And while some slightly fortunate entrepreneurs can finance their new ventures themselves or borrow money from family and friends, they are often the exception, not the norm. Here are five ways start-ups can raise money to kick-start their operations.
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1. Angel Financing
An angel investor is someone who invests in a start-up often in exchange for an agreed share of equity ownership or convertible debt. Angel investors are more often than not high-net-worth individuals who invest in entrepreneurs rather than their new ventures’ liability. Traditionally, their focus has been laying solid foundations for start-ups rather than maximizing profits.
While typical figures vary, most angel investments range between $25,000 and $100,000. Unfortunately, securing adequate angel funding is not easy, and some investors only seek to achieve outsized returns with hopes of replicating high-profile success cases like Facebook and Uber.
2. Crowdfunding
Crowdfunding involves raising capital for a company or project from a large pool of fundraisers (typically Internet users), each contributing relatively small amounts of money. According to Lantern by SoFi, crowdfunding is a relatively new way of raising capital and a viable source of alternative funding for both start-ups and growing businesses.
Thanks to the amazing resource that is the Internet, crowdfunding for a new business is not that hard. All an entrepreneur needs to set up a crowdfunding campaign is to choose a crowdfunding site, create a profile, describe their business and the amount they intend to raise, and tell a compelling story about their product, business or mission. Some popular crowdfunding sites include Kickstarter, Fundly, GoFundMe and SeedInvest.
3. Venture Capital
Most start-ups, particularly in the tech space, turn to VC (venture capital) firms when they need financing. The beauty of VC firms is that they not only provide capital but also strategic assistance, including meetings with potential partners, employees, and customers.
That said, VC funding is often difficult to obtain. Most VC firms only consider start-ups pursuing massive opportunities with immense growth potential and evidence of progress, e.g., early customer adoption.
4. Small Business Loans
Small business loans are a popular funding option for many start-ups, and for good reason. Both traditional and alternative lenders offer these loans. The most common options include small business lines of credit, working capital loans. SBA small business loans, and accounts receivable financing.
5. Partnership
Joining forces with a strategic partner is often a good idea. With the right strategic partner, a new business can raise capital, leverage its partner’s experience, offset its weaknesses, reduce liabilities and gain new perspectives on pressing issues.
But, External funding is the key to achieving fast growth as a new business. While it is possible for entrepreneurs to bootstrap their way to success. External funding amplifies their potential to capitalize on market opportunities.