Startup Financing: 4 Key Funding Options for Your Company
While the thought of starting a business can be quite exciting, it can be equally daunting as well. Studies show that 90% of startups fail. There can be several reasons for this. Best Key Funding Options for Your Company.
One, technical know-how may be wanting. Another reason could be the absence of an effective mentor who can guide the founder in making wise and prudent decisions. It’s possible if the business idea was brilliant and not executed poorly for one reason or another.
But there is one specific factor that can spell a huge difference between success and failure. The development and validation of a product take time, and startups, unlike bigger and more established companies, may not have pockets deep enough to endure prolonged periods of product iterations. In fact, a study released by startupgenome.com in April of 2020 revealed that 40% of startups only have three months’ worth of cash reserves.
Fortunately, entrepreneurs can raise more money today because of the prevalence of innovative funding options. Money makes the world go round, whether you’re boosting your finances to build a data security protocols management company, a SaaS venture for a walking meeting platform, or a consumer goods and services enterprise. Increase your probability of success by checking out these top key startup funding options for your company.
1. Angel Financing
“Angels” are high-worth individuals who make private investments to finance promising startups in return for equity or convertible debt (which can be later turned into company shares). Angel investors are not just out to make a “measly” 10% growth. What they are looking for are high-growth numbers, which they know can only come with high risks. Angel investors can be a great option during the initial stages of your startup when your business has yet to gain momentum and no other investor is willing to support you.
Because they are investing their own money, most angel investments fall below $1 million. Payback time is usually within 5 to 7 years with an annualized internal return rate or IRR of 20% to 40%. For more information on where to find angel investors, you can check out Angel Capital Association or ACA.
2. Venture Capital
Venture capitalists are similar to angel investors. They both commit to investing in companies they believe will succeed and are, therefore, willing to take some level of risk. However, unlike the private individuals who participate in angel financing, venture capitalists are professional investors. The money they invest from a network of partners in a professionally managed fund. These partners may include wealthy investors but are also likely to be financial institutions.
Since they invest other people’s money, venture capitalists tend to be more cautious than angel investors and may employ stricter screening procedures. One advantage in seeking out a venture capitalist is that they have more access to deeper cash pools. Depending on what growth stage a startup is at and on the amount invested, venture capitalists usually take 20% to 50% of its equity.
3. Business Accelerators
Business accelerators, also known as startup accelerators or seed accelerators, can be another potential funding source. Evidently, their purpose is to help your business accelerate or grow faster.
A business accelerator is a cohort program where a mentor provides the startup with the necessary infrastructure and support to jumpstart its pathway to success, usually for a period of three months.
These accelerator programs can be investor-funded and are primarily focused on startups, like Y Combinator. There are also university-supported programs and private startup accelerator programs.
Like all other investors, business accelerators expect to have a slice of your company, which can be costly at 5% to 10% of your equity in exchange for a short period of mentorship. However, many startups find that the cost is worth every penny. Besides, such accelerator programs can give you the critical business connections you need. You just need to choose carefully to ensure that you are not giving away chunks of your company for nothing.
4. Business Loans
Borrowing a business loan from a bank can actually be cheaper than equity financing. Unlike equity financing, debt financing has a different corporate tax treatment. There are more unique tax benefits for the latter and the interest (or dividend, in the case of equities) is usually lower. You also do not have to give up a share of our company, unlike with equity financing. And since you are not giving up any ownership of your company in debt financing, you are not obligated to give lenders any control over the business. These are perhaps some of the reasons why only a fraction of startups are venture-backed.
One caveat, though, is that debts carry a repayment obligation. Such debt repayments may reduce the company’s cash flow needed to fund its growth. Should you decide on debt financing, note that smaller banks tend to offer more competitive rates on loans and may likely have faster processing time than larger financial institutions.