10 Effective Ways To Raise Money For Your Startup in 2021
Money is the bloodline of any business.
“Fundraising is the gentle art of teaching the joy of giving.”
— Hank Rosso.
According to the United States Bureau of Labor Statistics (BLS), approximately 20% of new businesses fail during the first two years of being open, 45% during the first five years, and 65% during the first 10 years. Only 25% of new businesses make it to 15 years or more. These statistics haven’t changed much over time, and have been fairly consistent since the 1990s.
Lack of funding turns out to be one of the common reasons.
Money is the bloodline of any business. The painstakingly long yet exciting journey from the idea to revenue-generating business needs capital to fuel it. That is why entrepreneurs find themselves asking one key question at almost every stage of the business.
How do I finance my startup?
The requirement of funding depends largely on the nature and type of business. However, once you have realized the need for fundraising, below are some of the different sources of finance available.
10 effective ways to raise capital:
- Bootstrapping
- Bank Loans
- Funding competitions
- Angel Investors
- Venture Capital
- Private Equity
- Crowdfunding
- Government Business Grants
- Get Funding From Business Incubators & Accelerators
- Get the right business partner
1. Bootstrapping
When my co-founder and I started Instahealth in 2013, all we had was a great idea and boundless passion. We were not qualified to acquire any bank loans or attract any venture capital, so we had to figure out our own means.
Bootstrapping is the cheapest way of acquiring funding. The founders build the company with their own savings and financial or in-kind contributions from friends and family.
Bootstrapping is also referred to as self-funding. It is an effective way to start a business because first-time entrepreneurs often have trouble getting funding without first showing some traction and a plan for potential success.
Jeff Bezos’ parents invested $245,000 into his e-commerce startup, Amazon. Bill Gates’ parents contributed to funding his founding company.
2. Bank Loans
When entrepreneurs think about funding, banks are normally the first place that they go. Getting a loan to start an unproven business is indeed a bad idea, so I recommend that you first try bootstrapping before opting for a loan.
Banks take credit risk, which means they are conservative in how you should use their money. They will focus on your ability to repay the debt, and their loan pricing depends on the probability of you defaulting on your payments.
The bank provides two kinds of financing for businesses. One is a working capital loan, and other is funding.
A Working Capital loan is the loan required to run one complete cycle of revenue-generating operations, and the limit is usually decided by hypothecating stocks and debtors.
Funding from the bank would involve the usual process of sharing the business plan and the valuation details, along with the project report. These factors then determine whether your loan will be approved.
3. Funding competitions
These are a personal favourite and have helped me raise capital for both my successful startups.
An increase in the number of contests has tremendously helped to maximize the fundraising opportunities. It encourages entrepreneurs with business ideas to set up their own businesses. In such competitions, you either have to build a product or prepare a business plan.
Winning these competitions can also get you some media coverage, both locally and internationally. We, at Instahealth, benefitted a lot when we were finalists in the International Telecommunications Union Young Innovators Award in 2013.
You need to make your project stand out to improve your success in these contests. You can either present your idea in person or pitch it through a business plan. It should be comprehensive enough to convince anyone that your idea is worth investing in.
Dragon-Den style pitching competitions are also becoming much more popular. It’s a great chance to sharpen up your pitch and find out where gaps are. If you opt for this type of funding competitions, ensure that you protect your intellectual property and don’t share too much information early on.
This quick Google Search brings you multiple funding competitions that can help you identify which one your startup is a good fit for.
4. Angel Investors
Angel investors are individuals with surplus cash and a keen interest to invest in upcoming startups. They also work in groups of networks to collectively screen the proposals before investing. They can also offer mentoring or advice alongside capital.
Angel investors use their own money in return for equity or hybrid equity. You don’t need to pay them back if your startup fails, but you could end up sacrificing plenty of equity early on. The best angels also offer up their network, relationships & experience.
This alternative form of investing occurs in a company’s early stages of growth, with investors expecting up to 30% equity. They prefer to take more risks in investment for higher returns.
Angel investors have helped to start up many prominent companies, including Google, Yahoo and Alibaba.
5. Venture Capital
Venture capitals are professionally managed funds that invest in companies that have huge potential. They usually invest in a business against equity and exit when there is an IPO or an acquisition.
A venture capital investment may be appropriate for small businesses that are beyond the startup phase and already generate revenues. Fast-growth companies like Flipkart and Uber, with an exit strategy already in place, can gain up to tens of millions of dollars that can be used to invest, network and grow their company quickly.
Venture Capitalists, or VCs as they are commonly called, provide expertise, mentorship and act as a litmus test of where the organisation is going, evaluating the business from the sustainability and scalability point of view.
VCs usually write bigger cheques than angel investors, prefer companies with a bit of a track record & many will want a controlling stake early on.
However, there are a few downsides to Venture Capitalists as a funding option. They are drowned in opportunities. Getting time in front of one is hard, getting them to invest is harder.
They also often look to recover their investment within five years. If you have a product that is taking longer than that to get to market, then venture-capital investors may not be very interested in you.
Most venture capitalists won’t read a business plan unless the entrepreneur is introduced to them by a contact. — Guy Kawasaki
6. Private Equity
According to Investopedia, Private Equity is an alternative investment class and consists of capital that is not listed on a public exchange.
Private equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of public equity.
Private equity offers several advantages to companies and startups. It is favoured by companies because it allows them access to liquidity as an alternative to conventional financial mechanisms, such as high-interest bank loans or listing on public markets.
Certain forms of private equity, such as venture capital, also finance ideas and early-stage companies. In the case of companies that are de-listed, private equity financing can help such companies attempt unorthodox growth strategies away from the glare of public markets.
Private Equity helps produce strong companies, promote innovation, and spur job growth. — N. Robert Hammer
7. Crowdfunding
Crowdfunding is one of the newer ways of funding a startup that has been gaining a lot of popularity lately. It’s like taking a loan, pre-order, contribution or investments from more than one person at the same time.
This is how crowdfunding works — An entrepreneur will put up a detailed description of his business on a crowdfunding platform. He will mention the goals of his business, plans for making a profit, how much funding he needs and for what reasons, etc. and then consumers can read about the business and give money if they like the idea.
Those giving money will make online pledges with the promise of pre-buying the product or giving a donation. Anyone can contribute money toward helping a business that they really believe in.
The best thing about crowdfunding is that it can also generate interest and hence help in marketing the product alongside financing. This process puts funding in the hands of common people. It also might attract venture-capital investment down the line if a company has a particularly successful campaign.
Also keep in mind that crowdfunding is a competitive place to earn funding, so unless your business is absolutely rock solid and can gain the attention of the average consumers through just a description and some images online, you may not find crowdfunding to work for you in the end.
Some of the popular crowdfunding sites are Indiegogo, Kickstarter, Dreamfunded, Onevest, and GoFundMe.
8. Government Business Grants
These are dedicated funds for small companies. Government agencies usually provide investment in the form of debt funding.
If you comply with the eligibility criteria, Government grants as a funding option could be one of the best.
You just need to make yourself aware of the various Government initiatives.
In the U.S., there is a small business lending fund and a dedicated portal for Government grants available for local businesses.
9. Get Funding From Business Incubators & Accelerators
Early stage businesses can consider Incubator and Accelerator programs as a funding option. Found in almost every major city, these programs assist hundreds of startup businesses every year.
Though used interchangeably, there are few differences between the two terms. Incubators are like a parent to a child who nurtures the business, providing shelter tools and training and network to a business. Accelerators so more or less the same thing, but an incubator helps/assists/nurtures a business to walk, while accelerator helps to run/take a giant leap.
These programs normally run for 4–8 months and require a time commitment from the business owners. You will also be able to make good connections with mentors, investors and other fellow startups using this platform.
In the U.S., companies like Dropbox and Airbnb started with an accelerator — Y Combinator.
In Uganda, we have the phenomenal TheInnovationVillage which puts community at the heart of everything they do. They provide incubation, acceleration, co-working space, and business development services to entrepreneurs to enable and unlock their potential.
The Innovation Village also provides funding to startups through two internal investment vehicles, the 97Fund, and Kampala Angel Investors Network (KAIN).
10. Get the right business partner
Find someone with skills, abilities, and relationships that you don’t already have. It is better to have a partner bring in less capital but possesses relentless work ethic, far more experience, and can open the right doors.
Your business is something you gave birth to and will have to nurture to help it grow. You want a partner that will approach your business with the same level of enthusiasm and commitment that you have, but who also shares the same business “parenting” philosophies.
It is wise to approach finding a business partner as seriously as you would a combination spouse/daycare provider. A partnership is a long-term, legal covenant between two or more people. You will spend a lot of time planning major business events with your partner and need to be able to get along with him/her.
Your business partner will also directly contribute to the success or detriment of your efforts to raise money for your business.
Get the right business partner.
And now, your thoughts…
Everyone has ideas. Everyone has the next best thing.
In my opinion, the best way to secure funding is to show you can survive without it.
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