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Entrepreneurs are a creative bunch of individuals who constantly see the world’s pain points and annoyances as an opportunity to create something new.
But what always presents a headache is the challenge of funding. Startup ideas normally need some sort of outside investment to become a reality.
As statistics show, 82% of start-ups fail because of cash flow.
But it has not stopped 24 million Americans wanting to become self-employed in 2021.
To help you not become a “start-up fail” statistic we have provided information on the top 8 funding methods. Learn which funding option aligns with your financial situation and available resources, so you can hit the ground running with your startup idea.
Bootstrapping is as simple as using your own funds to invest in your business. For this you will have to take on your savings and pay the costs of running your startup; this will include also using your wage (if you keep your job while creating a startup) or trading services with other startups to save costs and needed services to run your startup.
This funding method is usually used in a very early stage of a projects and used by those who need to prove their concept; or for those who do not want to give up equity (ownership) in their startups.
The pros of this method are that you will have full control of your startup, meaning you do not have to give account of your decisions to anyone and you won’t be spending time figuring out how will you repay (investors or lenders); you will also have a greater negotiation power with investors when you get your startup to a profitable stage. The cons are that the expansion process (getting “big”) of your startup will take a greater time commitment than any other investment method. Another con is that, just in case you are not in the Forbes list of the wealthiest in the world, your funds will be limited, this means you are more vulnerable to eventualities that might arise, so your startup will always be “a couple of months away of closing”. Know in advance that you will have to invest beyond the us$100.000 mark, which is important cash.
Crowdfunding is a way of getting small amounts of money from a large group of individuals, basically you get funded “one drop at a time”. There are places where you can crowdfund your business with no expected returns from investors, and there are others that ask for a return. This method has become a popular chaise, so popular that there are many entrepreneurs doing it; this means that you will have to have a strategy to stand out of the competition; also you will need to invest in order to stand out, you must have a pitch deck (or product pitch) in order to get the attention of the potential founders/investors in that crowded space. The pros are. That, if you get success on that endeavor, it is a potent form of advertisement for your startup. Statistics show that less than 25% of crowdfunding campaigns are successful, and of those successful campaigns rise an average less than us$35,000.
Angel investors are high net-worth individuals, with the money and the business expertise, who are interested to invest in startups on early stages; that early stage means that you will need to have some traction on your startup; by traction we mean that the business model, the concept, the product or service have the ability to generate value (bring money back to investors). The amounts they invest range from us$50.000 to up to us$2.500.000; still, studies show that the average angel deal size in 2019 was $374,225.
The pros of being backed by angel investors is that you will have someone to share the risk with, the money to take your startup at a faster pace to a profitable stage, as well as a full committed advisor to your startup. That also presents a con and is that some angel investors like to involve themselves a little too much to the point of telling you what should be done in your startup. Also, as mentioned, they are experienced and smart individuals, so you have to truly know your business, your numbers, your industry and beyond in order for them to see you are worth the money and the investment.
This method of getting funding for your startup is for those who want to find mentorship and an environment to share experiences with other entrepreneurs, find potential partners or co founders, and savvy business individuals that will help you. Usually incubators and accelerators are backed up by angel investors, so you will find a good environment for business development and investment with an average investment of $38,000 for 7.3% of the equity. The main pro is that you will find a “all in one place” for your startup in an early stage. The cons are that usually you will have to give some sort of retribution, this is paying for the shared space or the mentorship, or both… and in some cases (each time more usual) you will have to give some equity (ownership) of the company to the incubator or accelerator. Another con is that they usually focus on tech-based business, so if you are not into tech, directly involved, you might find it hard to find a place that fits your startup.
Venture Capital could be said to be the last step in the funding ladder, you approach this type of funding if you need serious amounts of investment for your startup. These are groups of people that unite their big resources, invest in traction proved business projects, and take part ownership in exchange for their investment. Usually, these types of groups invest in, what they believe, are disrupting companies that are mainly technology based; they use sophisticated methods and legal vehicles for their investment and always take the time to do a rigorous study of the startup, the founders, the market and the development team before investing. You can expect investments superior to us$5.000.000 and can reach investments of tens of millions. The average deal in 2019 was us$8.000.000, to get there you should have a good deal of traction on your startup!
The main pro of using and reaching this type of investment is that these groups are all in, so they will give you all the money you need, all the contacts you need and their expertise to move fast and capitalize on the path already walk by them. A big con is that you are giving away ownership of the company; also, you will be audited (not only financially but also administrative) in order for investors to know that you are on the “right path” – whatever that means.
A venture studio is an organization that is dedicated to creating startups, these companies provide the initial team, strategic direction and capital for the startup to reach product-market fit. Venture Studios are closely involved in the day-to-day operations and strategic decisions of growing the new business, and they focus their efforts in getting the startup shows traction. Once traction is reached, they also work in assuring the startup reaches milestones in a systematic and professional manner. One of the pros of going with a Venture Studio for your startup is that you will only have to bring your idea and a small amount of investment (usually less than us$5.000) that will give you a substantial amount of equity (ownership) in the project; Also, the teams that Venture Studios get to each project are experts in their fields, that way other pro is that you can devote your time to other things because the Venture Studio is the one that runs all the needed actions from idea to market fit to investment. Basically, is a way of owning a company without the hardships of creating one. Some of the cons is that, even though you partially own the startup, you will be an advisor more than a decision maker in the startup. But, is always better to own a small percentage of a startup that generates income then own 100% of an idea without being developed.
The Small Business Administration (SBA) is an U.S. government agency created to bolster and promote the economy in general by providing assistance to small businesses. One of the main functions of the SBA is the provision of counseling to aid individuals who are in the early stages of creating a startup. Another line of functions is related to facilitating financial resources (loans) to those who wouldn’t otherwise qualify for financing; a typical SBIC loan starts from us$250,000, with an interest rate of between 9% and 16%. For the case of micro loans, also provided by the SBA, they provide up to us$50,000 with an average micro loan of just below us$15,000.
The main pro with the SBA is the ability to find counseling resources that will guide you to create your startup; also, you will find modest amounts of capital (presented as loans) to develop your business. Some of the cons is that for early stage startups, with no traction, will be difficult to qualify for a loan due to the short history record, if there is a record at all; if you qualify, the time it takes could be longer than expected and also you may be required to have a collateral (loan warranty) and it may become a personal liability if the business fails.
Small entrepreneurial endeavors can benefit from micro loans, this is a good option for those with a bad credit score or track record. Institutions in this field are more willing to approve loans to individuals who have a higher default risk. Micro loans in the U.S. average us$7,000 and range from us$500 to us$35,000.
A pro is that you will find an easier access to small amounts of capital for your startup. Some of the cons are that a higher default risk might represent higher loan rates; also, you will be involved in a long process (documentation wise) and it might take a lot of time to complete the paperwork required to apply.
As mentioned, startup ideas need fuel (investment) to become a reality. As a founder, you have to take into account at least two factors, your current financial situation and the financial resources your idea/startup will require.
Regardless of the idea and the funding path you decide, creating a startup requires a great deal of time commitment, knowledge and experience in taking MVPs to market. For those of you with any doubts regarding commitment, financial risk, and support, we strongly suggest evaluating the path of Startup Studios like FWD Ventures.
At FWD Ventures we are pioneering a new model for busy entrepreneurs and individuals to have the opportunity to launch startup ideas without the time commitment and financial risk.
It is time to capitalize on your business ideas instead of waiting for the perfect moment. Submit your idea for review. The FWD team will run a marketing analysis and respond back to you within a week. All submitted ideas are protected by our $1,000,000 dollars idea protection policy.
What are you waiting for? Move your life forward with FWD Ventures.
We’re looking for entrepreneurs who want to turn their ideas into a business.
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