Funding Sources For Your Startup

find more info Funding Sources For Your Startup

In this lesson, you’ll learn about the different options available to fund your startup and which ones to use depending on your situation.

It’s time to think about funding your startup.

Do you know how much you need?

If you don’t know, find out. You are the one running your startup!

http://blogneemahousearusha.org/?p=539 Monthly Cash Burn

It is how much your startup spends every month. Try to keep it as low as possible.

You CAN’T ignore this key figure!

How to calculate how much money you need

If you don’t know where to start, follow these steps:

1. List the stuff you need to buy and all the things you need to pay for.

2. Do your projected first-year cash flow. Estimate sales, costs, and expenses.

3. Those costs are what you need from investors.

4. It never goes exactly the way it’s planned (launch delayed, legal issues, etc.) so you probably want to estimate a buffer.

5. Reality check: if that calculated amount is way too much, investors will laugh at you. Spend less.

6. Double reality check: if you can spend less, maybe you can do it without investors.

Raising too little money

The main risk in this case is that your business will cease to exist before you can reach your break-even point (or before the next time you raise money).

Raising too much money

The main risks are:

– Not being able to actually find investors
– Waste money just because you can
– Bad media coverage if specialists feel it’s too much money

Bootstrapping means starting a company with little or no money, but utilizing the resources readily available to you. This means keeping your budget low, not taking a salary, working with your team to develop your product for sweat equity or outsourcing some functions altogether.
Pros:
– You are not depending on anyone (investors, banks, etc.)
– It helps you focus on prioritiesCons:
– It may take longer to grow since you can’t hire as soon as you would like

partnership with a big client buying a pilot project can help you a lot with finance!
Pros:
– No debt
– No investors
– You can get a lot of money if the company decides to keep working with you
– You can strengthen your brand fasterCons:
– Not easy to obtain such a partnership
– You are tied to the success of the pilot project
– The payment schedule may not fit your cash flow

A bank loan is another solution. Check carefully the conditions offered by the banks.
Some public institutions may also offer loans, sometimes with better interest rates and/or repayment schedule.
Pros:
– Usually quick
– Usually many funding options
– Possibly large amount of money
– You don’t give up equityCons:
– Difficult to obtain
– Time-consuming process
– You have to repay it with interest

Be very careful:
Depending on your company structure, you may be responsible for repaying the debt yourself if your company can’t.

Crowdfunding is the practice of funding a project or venture by raising monetary contributions from a large number of people.

Crowdfunding is a form of crowdsourcing and alternative finance.

It has become more and more popular in the past few years, especially with the emergence of online crowdfunding platforms. If you are curious, you can check how it works below.

Example:
https://www.kickstarter.com/

Pros:
– You check the interest for your product at the same time
– It’s a form of “upselling” (you sell your product even before it is ready)
– No debt, no investorsCons:
– You need to dedicate a lot of time (and money) to launch a successful campaign

You will have a lesson about crowdfunding later on this week.
An accelerator usually takes a single-digit chunk of equity in externally developed ideas in return for small amounts of capital and mentorship. They’re generally truncated into a three to four month program at the end of which the startups graduate.

We haven’t defined equity yet:

Equity is a stock or any other security representing an ownership interest. This may be in a private company (not publicly traded), in which case it is called private equity.

In short, having equity in a company means that you have a stake in the business you’re helping to build and grow.
Pros of accelerators:
– No debt
– Mentoring
– Free workplace (not always)Cons:
– You share a part of your company

Startup competitions are events where entrepreneurs can present their project in front of a jury.

The winner(s) may get some of the following:
– media coverage
– money
– mentoring

You usually have startup competitions during startup events such as:
– Web Summit (City changes every year)
– The Next Web (Amsterdam)
– SXSW (Austin, Texas)
– LeWeb (Paris)
Pros:
– If there is a prize in the form of money: no debt
– Usually great visibility (media)Cons:
– Few winners
– The time you spend on the competition
– Usually little money to earn

Grants are non-repayable funds or products disbursed by one party.
Your country/city may provide grants for entrepreneurs. Sometimes they target a specific sector, while other times it is just about boosting growth.
Check which ones are available to you and if your project fits their requirements.
They can be provided by institutions in your city, region, country etc. (European Union also provides grants, for example).
Pros:
– No debt

Cons:
– Usually a lot of paperwork (a loooot)
– Long process

Family & friends can provide you support in several forms:

– Moral support (don’t underestimate it!)
– Feedback
– Time
– Money (what this lesson is about!)

Pros:
– Easier to convince at an early stage

Cons:
– They may lose everything if things go wrong
– They usually have no idea about the business or your industry

An angel investor is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity.
Pros:
– Angels usually have experience in their industry
– Angels are more flexible than VCs (Venture Capital firms)

Cons:
– You give away equity
– Generally no “follow-on” investments

Venture capital is a type of private funding for early-stage firms. Venture capital funds provide funding in exchange for equity.
Pros:
– Large sums of money at once
– They usually have expertise in growing and exiting businesses
– They bring credibility to your company
– They usually have a vast network

Cons:
– You give away equity
– They may disagree with you and may even be willing to kick you out if necessary

Sources of funding depending on the age of the firm (US):
Book Suggestion:
The Art of Startup Fundraising, by Alejandro Cremades
http://startupfundraising.com/