Let’s talk funding. Funding rounds are part of the most important features of a startup, they make up its success story. Every business strives to gradually increase its customer base, make a return off of its initial investment, surpass its rivals, and eventually win much desired recognition.
Although it’s not impossible, most startup companies have trouble raising money in the beginning. A 2016 British Business Bank poll, according to Cloudways, revealed that more than 60% of enterprises require external financing rounds to get off the ground. Startups start with a seed round and moves through A, B, and C investment rounds as it matures and advances through the fundraising phases.
Investors want startups to succeed because it encourages more investment support for the company’s objectives and causes. In addition, they also want a return on their investment. Because of this, almost all investments made at one or more stages of development funding are set up so that the investor or investing corporation retains a stake in the company or profit made.
The startup’s valuation, together with its maturity level and development potential, is one of the most significant variations across investment rounds. These traits consequently affect the types of investors who are likely to take part in a startup’s finance.
Because the seed fund means a lot to the innovator, it is important to understanding the different types of investors or potential investors.
Bootstrapping also applies to the use of personal savings. It applies more financial strain on the entrepreneur but allows him full ownership and free of debt.
One of the simplest, yet frequently underutilized sources of funding available to the majority of entrepreneurs is personal savings. Personal savings should be the best source of funding for new startups as it allows the founder rely on his personal resources. This is necessary with the difficulty in raising finance at the first phase of business.
More so, lenders and investors believe that if an entrepreneur has invested his own money into the startup, he will have to put in the necessary effort to make it successful.
Accelerators are more interested in supporting and nurturing early-stage startups. They would offer professional services, networking opportunities, counseling, and workspace in addition to small startup capital.
Y Combinator, Techstars, and 500 Startups are some of the most well-known accelerators helping African startups. These accelerators have fueled startups with supportive ecosystems and funding via programs. Besides the investment, accelerators typically offer their startups free office space, business and management consulting, feedback on the product, and access to investors in the form of a demo day.
Y Combinator (YC) is the first independent and arguably the most successful accelerator program globally. It has incubated and funded billion-dollar startups such as Airbnb, Stripe, Flutterwave, Quora, and Coinbase.
Crowdfunding has become one of the most popular seed fundraising methods. There are several active platforms available to the public, and anybody from anywhere in the globe can support a concept, idea, or product.
Crowdfunding sites have become an option for raising funds. It usually involves exchange for equity, rewards, debt, or nothing at all. Crowdfunding can provide startups with fast access to cash, but it requires a strong promotional strategy, transparency, and possibly giving up some equity in the business.
However, it is important that startups know what kind of crowdfunding is best for their business.
Money borrowed from relatives and friends or obtained as a loan from a bank is frequently the basis of debt. An investor will lend money to a business owner for a set length of time at a fixed interest rate in a procedure known as debt funding. Bonds are sold by the startup in return to the investors, serving as a certificate for the loan. In this case, the company must pay the debt fund back along with the interest payment on a predetermined date.
The interest payment, which is often fixed at a fairly high rate in beginning situations to offset the risk of business failure, is clearly the investor’s gain in this situation. Additionally, the startup or company’s assets are used as debt securities to secure the business loan. The investor or the bank may recover money by seizing assets in the event of non-repayment or business failure.
Venture Capitalists (VC) Funding
VCs are high-profile investors looking to fund startups based on a variety of factors. Factors considered include growth potential, market circumstances, founder vision, concept, and execution. In return, they get a stake in the business or a share of the startup’s stock. Following the seed stage, VCs usually participate in several rounds of financing.
For early stage startups, getting a VC funding is difficult; not impossible though. But convincing multiple people in the VC firm is difficult especially for startups without market advantage.
VC investment is a form of business growth capital. It aids in creating new doors and prospects for startups, establish solid connections, and enable a better position in the market. In addition it provides big sums of cash.
Angel Funding or Angel Networks
Investors may organize into angel networks for early-stage startups and each make contributions to the idea or business. Angel investors are usually established entrepreneurs themselves and only seek to profit from their investments.
Angel investors provide the first funding necessary for your business to get off the ground in exchange for a share of the firm. You’ll both benefit financially if the startup succeeds. On the other side, an angel investor won’t expect you to repay the money if your business fails.
However, due to their market experience, they are quick to raise their reward bar very high. The pressure to generate is intense when you are being held to this type of standard.