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It’s the fear that casts a shadow over every aspiring startup: funding. Or, more specifically, the absence thereof.
Securing some form of financial backing is imperative for the liftoff of any startup. Without it, a startup may find itself scaling back, delaying its operations, or even facing the prospect of total dissolution.
So, in attaining this ever-important startup funding, what avenues should entrepreneurs look to explore? Moreover, in the case that this funding continues to elude a startup, what can it expect to unfold in the aftermath?
Why Is Funding Essential to Startups?
Launching a business venture, or literally “starting up” an initiative, demands a few key elements: a brilliant idea, a well-thought-out business plan, the right team, and, in some cases, a dedicated workspace. But, unsurprisingly, the cornerstone of this endeavour is money.
Commonly known as ‘startup funding’, this is essential to get a business up and running, and there are several different financial avenues for startups to explore in this regard.
Unfortunately, no matter how much passion has gone into a startup, or the calibre of the assembled team, startup funding will remain a necessity. This is what will allow a startup to pay for necessities such as marketing, renting space, paying employee wages, buying inventory, and other initial operating expenses.
Beyond these immediate needs, funding also plays a pivotal role in bolstering the growth of a startup, helping it to increase its visibility and thus make a more significant impact on the market. In short, more funding enables a startup to generate more attention, which may even have the potential to attract investor interest.
Not to mention, when it comes to startups, time is money. The more funding a startup can initially secure, the greater the likelihood of it taking off and, subsequently, beginning to make a profit later down the line.
Navigating Startup Funding
The initial phase of the funding journey should involve thorough research. Prior to seeking financial assistance, a startup must invest time in understanding the anticipated costs of its venture. This should all be detailed in a comprehensive business plan that should include research on the costs of similar products in the market as well as an analysis of the expected pricing of your own products.
Once you have an idea of the costs and can be sure this demonstrates the initiative is a viable idea, founders can proceed with securing investment. Regarding startups, this is what is most commonly referred to as seed funding.
Seed capital is typically provided to startups by private investors and is usually done in exchange for a share in the future profits or an equity stake of the company. Startups often turn to seed capital because other public institutions, such as banks or other financial investors, can be reluctant to invest in a company with no previous history or credibility.
While crucial, seed capital often constitutes a relatively modest amount. It’s important to note that this funding isn’t intended to sustain a startup in the long term; rather, it should suffice for the achievement of initial goals. Typically, multiple rounds of seed funding are required for a startup to secure the necessary financial support.
Once seed funding has successfully propelled an initiative into operation, the next stage of investment often involves seeking venture capital (VC) – assuming everything progresses as planned. If a VC firm is impressed with the startup, it may inject more substantial funds into the venture. In return, VCs typically acquire a stake in the startup.
Types of Startup Funding
The typical narrative for many startups involves an initial phase of seed funding, followed by a subsequent stage of VC investment. However, delving deeper into this process reveals various avenues that founders may explore when in search of startup funding.
Self-Funding and Bootstrapping
To get startup funding, an obvious answer lies right under the nose of founders: Tapping into personal funds. Self-funding or bootstrapping a startup means using personal funds rather than seeking external investments.
While this approach offers advantages such as avoiding substantial borrowed amounts and preventing investors from acquiring a stake in the business, this is not a viable option for all. After all, not everyone possesses a pot of savings to rely on. In such cases, alternate options are necessary.
Crowdfunding
Entrepreneurs can look to crowdfunding as a source of startup capital. This involves reaching out to a broad audience of individuals, often looking to online platforms with large audiences, to fund a venture.
Particularly in our modern age with wide-scale internet accessibility, it’s never been easier to reach a vast online audience with social media. There are even crowdfunding websites founders can look to to find eager investors.
Grants and Loans
Startups may initially be supported by various loans and grants – though it is important to note that these concepts differ in nature.
Entrepreneurs may apply for a business loan from a bank, given their credit score and the viability of the startup are strong enough, or look to more familiar faces, such as friends and family. Alternatively, loans can also be extended by private investors or angel investors, possibly even from high-net-worth individuals (HNWIs).
A grant is a little different. These typically come from the government, as part of a corporate scheme or initiative, or from a nonprofit entity. As opposed to loans, grants are gifts – repayment is not necessary.
Given their gift nature, grants often involve a competitive application process. However, once awarded, they represent a fantastic source of investment for startups.
Incubators and Accelerators
As indicated by their names, accelerators “accelerate” the growth of an existing company, while incubators “incubate” the ideas of an entrepreneur, helping them to build their business from the ground up.
Depending on the stage of the startup, incubators or accelerators may be of use to its founders. These programmes offer mentorship, networking, and even limited funding to early-stage initiatives. These programmes can help to build up a startup, increasing its visibility and, if successful, potentially helping it to attract further external investment.
Private Equity
As mentioned, following raising an initial stage of seed capital, promising startups may go on to attract the interest of venture capitalists.
These are typically larger investments, helping a startup to grow quickly so VCs can begin to see a return on its investment as soon as possible, with interest.
Private equity may come from more established institutions but it can come from eager individuals, such as angel investors and other private investors, who will give financial aid in exchange for equity or partial ownership of the startup. They may even sit on the board of the startup to advise it and help it succeed.
No Funding? What Comes Next
Without adequate funding, it’s unlikely that a startup will be able to get off the ground and grow its business in the way it had planned.
Struggling to stay afloat, the startup may need to take measures such as scaling back its operations, reducing the size of its team, and, in drastic cases, putting a stop to its operations altogether.
If a startup cannot find any hopeful leads to make it even to the first round of seed funding, this may be a sign that the initiative is not viable, or that the business plan has not yet been developed enough to inspire external support.
While this setback may be disheartening, entrepreneurs should view it as an opportunity for reassessment. Additional research may need to be conducted to understand how the product fits into the market niche, or into devising strategies to help make it stand out. With a more refined business plan, operations can be relaunched at a later stage.
On the other hand, if a startup has secured seed funding but struggles to attract venture capital, there is a little more room for optimism.
In such instances, founders should attempt to get creative with their financial strategies. This may involve revisiting seed capital options, such as bootstrapping to generate sufficient funding or making renewed efforts to persuade friends and family to invest in the venture.
It should be stressed that a lot of startups struggle to find funding. So, although this may be disheartening, it shouldn’t put you off. In fact, according to Business Manchester, the startup failure rate in the UK as of 2023 is approximately 60%.
So, anybody who harbours hopes of launching a startup ought to do so with the high failure odds in mind. In the startup game, patience, and a good deal of determination, truly are the greatest virtues of all.
Entrepreneurs must thoroughly explore diverse funding avenues to determine the most suitable options for launching their startups successfully. It is this comprehensive evaluation that is perhaps the most crucial step to effectively propelling a startup to fruition.
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