You have an idea that you think can turn into a wildly successful startup. The only problem? You need to get funding before you can get it off the ground.
Funding is one of the main issues that entrepreneurs encounter when trying to launch a business, and why many business ideas don’t come to fruition. Depending on your idea, you’ll probably need funding to create your product, distribute it, market it, and hire help.
With so many options to get funding, you may feel overwhelmed and not know where to begin. That’s why we broke down the different ways you can get startup funding, and how you can set yourself up to get a “yes” from investors.
First things first: what’s the difference between a startup and a small business?
When you’re getting started on your new venture, you may not know how to classify it. It’s important to know whether your idea is a startup or a small business because that will determine how you’ll present your idea for funding.
Startups are different from traditional businesses mainly because they’re designed to grow fast. They’re typically technology-based since that allows them to scale quickly in order to serve a very large market. For instance, a local restaurant wouldn’t be classified as a startup, since its market is limited to those who can travel there.
Startups also tend to be a new idea that solves a problem in the market. A barbershop wouldn’t count as a startup, but a mobile barbershop might.
Since startups tend to be “disruptive” and new, there’s more risk associated with investing in one. For that reason, startup investors will typically look for the highest potential return on investment, to balance out the risk. Startup investors will also likely be more involved in building and operating the business since a new idea requires more guidance.
1. Create a business plan
Not only will a clear and detailed business plan make you more legitimate in the eyes of investors, but it will also set your business up for long-term success. Take time to define your vision for your startup. What is it? Who does it serve? What problem does it solve?
When creating a business plan, you’ll also want to perform market analysis. Who is the competition? Is there a need for the solution you’re offering?
Finally, a solid business plan needs to have financial projections for the next three to five years. Make sure you’re realistic with the financials. It’s normal for a business to not be profitable until the second or third year, and that’s ok. Investors will value your ability to make a realistic projection rather than a false promise of immediate profits.
2. Bootstrap it
While you may be excited about your idea and want to secure funding ASAP, you’ll want to put some skin in the game before you ask others to do the same. That means initially working on your idea as a side hustle, and burning the midnight oil to get it off the ground. Testing out your idea before asking for funding will make you seem more committed, and will also help you determine whether there’s a demand for your idea or not.
3. Friends and family
According to a study by Fundable, friends and family count as the second most common startup funding source.
Asking friends and family to contribute to your startup has a lot of benefits. Since they know you and your integrity, they’re more likely to believe in you and your product. They’re also more likely to not charge you interest on a loan, helping you to grow your business faster.
You may be worried about tarnishing relationships in case things don’t turn out well, which is definitely a risk you need to consider before asking friends and family for funding. On the other hand, not wanting to let down your loved ones can actually make you more motivated to make the business successful.
4. Venture capitalists
Venture capitalists, or VCs, invest in the early stages of your company in exchange for equity. Because their future earnings from your business depends on how well it does, VCs have a vested interest in your startup’s success. This can be a good thing, since the VC firm can give you guidance and support. On the other hand, if you give away more than 50% of your equity share, then you may lose control of the directions that your business takes, so be careful when agreeing on equity terms.
5. Angel investors
Angel investors are similar to VCs in that they both take an equity share in exchange for their funding. However, angel investors differ from VCs in that their funding can be exchanged for convertible debt.
While VCs may get involved in a startup in the expansion phase, angel investors most commonly fund projects in the seed or early stage:
Angel investors also tend to work on their own, without the input of a committee like a VC firm would. When you get an angel investor to fund your startup, it can be seen as a vote of confidence and a signal to VC firms to invest in your business at a later stage.
If you have a unique idea that you think will appeal to a wide audience, then why not let them contribute to making it a reality? That’s the basic concept behind crowdfunding, a relatively new practice where a large group of people each put in a relatively small amount of money to fund your company. There are several platforms that allow businesses to crowdfund, the most common ones being Kickstarter and Indiegogo.
In order to launch a successful crowdfunding campaign, you need to make sure that the crowd has a clear idea of what your project is, who it benefits, and why they should contribute to it.
An underlying theme across these funding methods is relationships. It takes a lot of trust for anyone to put their hard-earned cash into your venture. Attend networking events in your industry, reach out to other entrepreneurs, and don’t be afraid to tweak your idea until it’s set up for success. You obviously believe in your idea – your main task ahead is to get others to believe in it too.