Investments are the lifeblood of startups. This is true for all businesses and especially vital for small businesses and early-stage startups. Knowing the different types of startup investments available will make the difference between getting that funding to hire or miss the best talent.
For many entrepreneurs, finding the much-needed funding may feel like an aimless task. However, by knowing what types of startup investments and where to find them, you are taking the first steps in getting your business where it should be.
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Why Startups Need Funding?
According to a 2020 article, the widely given reason why startups fail is finance problems. Half of the startup founders who participated in the survey admit that their project did not have the appropriate budget, while 75% tried to self-fund their businesses. However, as their startups moved on to the later stage of development, financial problems arose.
By interviewing real startup founders, this study shows the importance of startup investments. Financial funding will serve as fuel to help startups develop, and maintain themselves during different stages of business development.
As history has shown, great ideas are no longer enough to succeed in these business times. For entrepreneurs like yourself who are looking to grow their small business, looking for funding for your startup may be the way to go.
There are many ways for a business to acquire capital funding as there are various forms of investments. Read on and learn more about the different types of startup funding options and what investors look for when they invest in startups.
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Types of Funding for Your Startups
Time is money. This saying is especially true for entrepreneurs who need to raise funds to move their business to the next phase. It will cost money to hire additional employees, attract specialists, increase production, and keep the operations running.
So, as a startup founder, you have to know the types of funding that are available for your venture. Here are some of the most common types of startup investments that allow you to generate capital for your startup venture:
Bootstrap funding means founders use their savings or personal money and assets to raise capital for their companies. Founders who prefer this type of startup investment do so to prevent third parties from gaining interests or shares of their companies’ profits.
The most common method used by entrepreneurs is to raise capital for their startups. As the name suggests, crowdfunding raises initial investments from a large group of people—friends, family, individual investors, and even customers.
These days, crowdfunding is done primarily using social media and other funding platforms. With the rise of social media and other online crowdfunding platforms, entrepreneurs will have a single streamlined platform to showcase their business pitches to interested parties.
Entrepreneurs can find investors willing to invest in thousands for an equity share. Some individuals will contribute $30 in exchange for your product or other rewards.
A method involves founders raising capital through borrowing cash. There are two major types of this fundraising method:
- Small bank loans are what rising businesses avail as they have lower interest rates. These loans are also readily available, especially for startup ventures.
- Asset loans are another way for founders to raise capital funding. This debt funding raises higher capital than small bank loans by borrowing cash against collateral. The said collateral can be the founder’s asset or assets of someone involved in the business. However, not many entrepreneurs take this option to raise funds as the chances of losing assets are high.
These are high-net-worth individuals interested in providing capital funds to startups in exchange for ownership equity or convertible debts.
These startup investors usually also offer mentorship. They can also help you improve your business network. You can pitch your business ideas to angel investors directly in events that include live business pitches, and other startup founders can help you connect with angels or with angel investor groups.
Venture Capitalist Firms
They are private investors that look for companies and startups with high growth potential. Venture Capitalists (VCs) usually participate in the early rounds of funding. VCs will target startup businesses that are on the stage of commercializing their ideas.
VCs will buy equity shares in their target startups. Most of the time, they will also provide consultancy and advisory roles to nurture these firms. They look for strong management, uniqueness, and competitiveness of the product or service and a large potential market that will lead the VCs to have a strong return on their investments.
Accelerators and Incubators
For founders, this type of startup investor can be their gateway to the other investors in this list. accelerators help startup ventures to hasten their development. They may provide a set timeframe to mentor and fund startups.
Meanwhile, incubators focus more on helping startups or individual entrepreneurs in refining their ideas, establish their business plans. They also help founders work on their product and service market fitness and identify possible issues.
Both accelerators and incubators aim to speed your startup company to the next stage.
Why Do Startup Investors Matter?
There are many types of investments available for your business. Startup investors put up their money, time, and resources to help startup businesses grow and be profitable. Some investors specialize in the different stages of a startup cycle. What’s important is that you have various ways to raise capital funding as your startup grows.
Startups usually need working capital and according to a 2020 survey, 82% of startups fail due to problems with their cash flow. This is why small businesses and startup ventures seek funding.
The other reasons are to purchase fixed assets, to improve services, products, processes, and premises, to expand, and to refinance. Knowing what your startup needs will allow you to plan out your fundraising campaign.
Understanding the differences between startup investors will be valuable in raising funds. By knowing what startup investors look for, you will be able to partner with the right investors at every step of your startup journey.
But first, you need to make your idea attractive to investors. We, at Full Scale, specialize in helping budding startup software companies grow. Our pool of talented specialists will help you scale your business every step of the way, from product development to marketing.