The Best Startup Funding Options: Which One to Choose?

57 Secrets of Crowdfunding

This guide unveils everything you need to know about successful crowdfunding

  • Get Traffic
  • Create a Compelling Campaign
  • Raise Money to Make Your Exceptional Idea a Reality!
Get Free Book

The Best Startup Funding Options: Which One to Choose?

08.04.2021

There are some essential steps a startup needs to take to be successful. If you have a good idea that solves a problem, you’re on the right track! Once you have an awesome, dedicated team that believes in the idea, the one thing you’re missing is the funding. 

Startup funding is the fuel that will help you execute your business the way you want. The bigger your budget, the more wiggle room you will have to choose the right way to go to market. If you’re new at this and don’t yet know how to raise money for a startup, you’ve come to the right place!

What are the best startup funding options? Read on to find the right one for you.

The most common startup funding options are: 

  • Love Money
  • Angel Financing
  • Crowdfunding
  • Business Startup Loan
  • Startup Incubators and Accelerators
  • Competitions & Grants
  • Venture Capitals

Love Money

Love money is funding you raise from your friends, family, and other loved ones. This is a startup funding option that you use at the very beginning of your venture when you are just taking baby steps. It is not based on a solid business plan but rather on the close relationship you and your potential investor have.

If you are just starting off and don’t have much to show to Angel Investors or Venture Capitals, Love Money is the way to go. You can take it as debt, sell them your equity, or do a hybrid between the two and pay them back from the profit you make in the future.

Here are some advantages and downfalls you get with this startup funding option:

checked-final

  • You have more room to negotiate on the terms, while with banks or other investors, this might’ve been difficult.
  • Your loved ones already trust you and know about your startup.

cancel-final

  • The funds of your loved ones might be limited.
  • If you lose their funds, your relationships might be put at risk.
  • Complications might come up from mixing relationships with work.

Angel Financing

After you’ve got all the love money you could, it’s time to look for a more serious startup funding option – Angel Investment. Angel Investors are usually people who fund early-stage startups in exchange for equity ownership. They take on a big risk early on and hope for a big payoff in the future.Angel Financing

These investors are usually prepared to invest $25,000-$100,000 into a startup, but that’s not the most important investment they make. Most Angels will also invest their expertise and serve as advisors to ensure your success.

How to raise capital from Angel Investors?

– Search for an Angel Investor Organization near your region. Attend events, or participate in pitching sessions that they hold.

– Search in your network. Being referred to an Angel Investor will increase your chances of raising funds.– Advice and real-life expertise.

Here are some advantages and disadvantages  you get with Angel Financing:

checked-final

  • Advice and real-life expertise.
  • Flexible deal terms.

cancel-final

  • Giving up some decision-making control and allowing them to guide you.
  • High pressure to achieve rapid growth.
  • They may require a bigger portion of your equity.

Crowdfunding

This startup funding option is perfect for hardware startups. Crowdfunding is the process of  acquiring funding from a “crowd.” This is done through popular crowdfunding websites where you present your idea and ask for small amounts of funding from many individuals, focusing more on the number of investors rather than the investment size.

Crowdfunding gives you a real opportunity to receive the funding you need to bring your ideas to life. It can also be an excellent promotional tool for some startups. If you are asking yourself “how to raise capital to start your own business,” crowdfunding might be the most realistic option there is.

One of the biggest advantages is that you can create a community around your product to give the potential backers yet another reason to donate. This community will also help in promoting your product and keeping up the buzz even after you launch.

Individuals may invest in your idea with different terms. If you choose a rewards-based option, the donations will act as a “preorder” of your product or service or give the investors a certain discount after you start operating. You may also go with equity crowdfunding, whereby the backers (people who donate to your campaign) of your idea will be awarded a certain form of equity of profit shares in your startup.

The most popular crowdfunding platforms are  Kickstarter, Indiegogo, GoFundMe, SeedInvest, Crowdcube, iFundWomen, Crowd Supply, Crowdfunder, Fundly

Setting up your profile on a crowdfunding platform is pretty straightforward. You need to describe your company, your idea, how much money you are trying to raise, and the perks for backers. However, simply posting your project on a crowdfunding platform is not enough.

Promoting your project is just as important as having a good idea. Click To Tweet

After all, who needs a good idea if nobody knows about it? If you’re looking to successfully crowdfund your startup or maybe even run a $1M campaign, you need to collaborate with crowdfunding consultants.

You surely don’t want to be in the 65% of crowdfunding campaigns that fail to reach their goals. If you want to fully crowdfund your startup, be in the 2-3% of campaigners who raise above $100K, or maybe even in the 0.1% who raise over $1M, you will have to work with the pros.

Crowdfunding consultants or agencies take on a huge part of marketing your product and building your brand. Here are some advantages and disadvantages of working with them:

checked-final

  • They have the expertise and experience of carrying out outstanding crowdfunding campaigns.
  • They have a huge network of influencers and journalists who will create buzz around your product.
  • You can set a much higher goal because, with their help, you can reach it.

cancel-final

  • The marketing costs. But, the good news is that it’s easy to find investors for it.

Take the first step towards your $1M+ Campaign now! Apply here.
Here at TCF, we’ve seen it happen a lot. Having ran more than a dozen $1M campaigns, we see that investors like the concept of crowdfunding since it’s not so risky for them. 

Business Startup Loan

Taking business startup loans is a very popular startup funding option. If you have a strong business plan and good credit standing, you’ll be good to go. 

Different banks have different financing options, terms, and funding processes. If taking a business startup loan is your preferred financing option, then you have to find the one best fit for your needs. For example, if you need funding for a startup that isn’t going to make sales immediately, you will need a longer principal payment postponement at the start of the loan.

Here are some questions to ask when figuring out whether your bank is giving you the business startup loan fit for your needs.

– Is there a principal payment postponement at the start of the loan, and how long is it?

– How often is the interest payable?

– How much is the interest rate? Is it fixed or variable?

– Does the loan require collateral or security?

– What fees do you have to pay to get the loan (e.g., origination fee, underwriting fee, administration fee, etc.)? 

– What conditions (covenants) does the loan impose (e.g., interest coverage ratio, maximum debt-to-equity ratio)?

– Are there limitations on how the loan may be spent?

– Are you required to show any periodic reports, and if so, what are they?

Overall, here are advantages and disadvantages of taking a business startup loan:

checked-final

  • There are no strings attached, and once you’ve paid it off, you’re free. 

cancel-final

  • You have to pay it back whether your succeed or not.
  • It is highly risky. If you can’t pay it back, you will go bankrupt.
  • Some business startup loans may require a personal guarantee from the entrepreneur.

Startup Incubators & Accelerators

Startup incubators and accelerators give you amazing opportunities for rapid growth. Most programs have the goal of preparing startups for investment. They will work on the idea with you and suggest improvements based on their knowledge of the sphere. Their extensive experience is especially vital to those who are starting their first venture.Startup Incubators & Accelerators

Some programs offer funding for your startup as well. For example, Y Combinator invests $125,000 into startups that get accepted to their program. Programs that are on a local scale will offer a smaller amount. 

Here are some advantages and disadvantages you get with such programs:

checked-final

  • You will receive lose mentorship, an extensive network of field experts and investors, and possibly an investment into your startup.
  • They will introduce you to a large pool of potential investors, as well as teach you how to raise funding for your startup.
  • Having an incubator or accelerator program in your startup’s “resume” gives you lots of credibility. 

cancel-final

  • Such programs do not guarantee any funding. Most programs provide support in other ways.
  • The application process is complicated and possibly limited to some geographical locations.
  • If they do give your startup funding, they require a bigger chunk of your equity.

This is not just a direct startup funding option, but it’ll open doors for your startup to get funded in the future. Search the web for a startup incubator or accelerator program in your region and apply!

Competitions & Grants

Competitions & GrantsThis is not just a direct startup funding option, but it’ll open doors for your startup to get funded in the future. Search the web for a startup incubator or accelerator program in your region and apply!

Startup competitions have become very common events. They encourage entrepreneurs to start their own businesses and create something new. In exchange for an invention or an innovative idea, organizations award you some seed money to get you going.

There have been startups that only got their funding through competitions. This financing is usually awarded to the startup founders to use however they find fit. On the other hand, there are more formal competitions held by governments that give out grants to those with the best ideas and execution plans.

During the application process, you would usually need to provide the following:

– A very detailed project description.

– A thorough budget plan for how you intend to spend the grant.

– Proof that the team is competent to execute the plan.

– Very long and thorough application forms.

Before applying, it is a good idea to make sure your startup fulfills the following criteria:

– Your startup idea is relevant to the grant’s mission

– Communicate through the application why your idea is important

– You have a very thorough and focused plan

– Your plan and budget are realistic

– You can match the funds

Here are some advantages and disadvantages of grants:

checked-final

  • You won’t need to pay it back.
  • You keep the control of your business.
  • It’ll be a good public endorsement for your company.

cancel-final

  • Filling out grant applications is a very difficult and long process.
  • Government grants are very competitive and have extremely strict guidelines and requirements.
  • Many grants also require that you match their funding.

Venture Capitals

Venture CapitalsWhen choosing this as your startup funding option, keep in mind that you will have to spend your grant exactly according to the plan you presented. There will be periodic checkups, and the funds may be given out at certain intervals.

Venture Capital firms are also a popular startup funding option. VCs usually go for high-growth startups from sectors such as software, digital media, semiconductor, mobile, SaaS, biotech, etc. They also try to invest in early-stage or Series A round startups that have shown promising traction.

How to raise capital from a VC? Keep in mind that they get too many emails and offers, so you have to stand out. The best way to impress a Venture Capitalist is to have their colleague introduce you to them. This is when you need to give them your “elevator pitch” and spark their interest. Pitching to the right Venture Capitalist is key in getting funded. Make sure that your fields and intentions align.

Advantages and disadvantages of raising funding from VCs include:

checked-final

  • They give a lot more than just financing. They provide you with capital, introduce you to potential clients, field experts, human resources, etc. 

cancel-final

  • It is difficult to raise startup funding from such firms since they usually make high-return investments.
  • It is a lengthy process. The firm has to carry out its due diligence before investing. Be prepared for many meetings, presentations, as well as lots of paperwork.

Final Thoughts

Choosing the best startup funding option for you is a complicated decision. If you’re still asking yourself “how to raise money for a business,” it’s a good idea to look over this article. If you don’t have the time, then we’ll just leave you with the following. Final Thoughts

Usually, a startup would start off with some Love Money, apply to a startup incubator or an accelerator program to gain some traction. If you’re lucky, you might win competitions or grants to get you started.

All financing options have some strings attached. Angel Investor will invest in your high-risk, high-reward startup in exchange for a big chunk of your equity. So will Venture Capital Firms, but it will take a lot of time, effort, and convincing. 

Taking a business startup loan might be too risky, but if you have the experience and knowledge you need, you’ll be good to go.

Crowdfunding seems to be the option that will boost your business, as well as set you up with customers and sales right off the bat. Remember that collaborating with crowdfunding consultants is key in running a successful campaign.

Angel Poghosyan

Angel Poghosyan

6+ years of doing content, marketing, and strategy for startups & businesses. Specializing in social media, entertainment, and tech.

Comments

Leave a Reply

Your email address will not be published. Required fields are marked *

The Everything Guide to Crowdfunding Taxes

08.04.2021
Read Article