Sources of Startup Capital

Written by Peter Tran

July 29, 2017

To many people, starting a business may be a bit overwhelming. Entrepreneurs not only need to define their value proposition but they must also setup operations, offer economically viable solutions, gain credibility, build a customer base and generate revenues. Although entrepreneurs face a number of challenges when they commercialize their business ideas, raising startup capital […]

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To many people, starting a business may be a bit overwhelming.
Entrepreneurs
not
only need to define their value proposition but they must also setup opetions,
offer ally viable solutions, gain credibility, build a customer base and
genete revenues. Although repreneurs face a number of challenges when they
commercialize their business ideas,
raising startup capital
(seed investm) to
fund their business efforts is the most challenging of all.

Although the
pool of capital
available for startup companies is not significantly
larger today than a decade ago, the variety of financing options is larger. The
large variety of financing sources makes ising funds for differ vures easier.
However, every specific source of financing is associated with certain obligations
that repreneurs must understand before
raising capital
. The more educated repreneurs
are, the more likely they are going to succeed in ising startup capital.

The following are the major sources of funding for repreneurs:

Personal Finances
People start companies at differ points in their lives. Some
entrepreneurs start

companies during the early stages of their career. A majority of repreneurs start
companies at later stages in their lives and these repreneurs often have personal
assets that they could use to finance their ideas. It is important for repreneurs
to invest their personal savings in their
business ideas
as it indicates that the
repreneur is confid about his or her own idea, thereby encouging other investors
to look at the idea more seriously. After all, who would want to invest in a company
wherein the founder does not want to bet on the idea? Additionally, repreneurs
who do not put their personal savings into the vure can find it hard to ise
money from friends and family. Entrepreneurs should think thoroughly before investing
their personal finances. If the business idea is not feasible, the repreneur
loses everything.

Friends and Family
Friends and family are important sources for
financing startups
since they would
like to see the repreneur succeed. Such loans can be obtained quickly as this
type of financing is based more on personal relationships than on financial ysis.
However, friends and relatives who provide business loans sometime feel that they
have the right to offer suggestions concerning the managem of the business. Their
suggestions might be orthogonal to the repreneur’s sttegy and might cre
fissures in the relationships. It is important to minimize the of damaging
important personal relationships. Therefore, entrepreneurs should plan on repaying
such loans as soon as possible even if the business idea fails, thereby ensuring
that relationships are maintained.

Angel Investors
A large number of individuals invest in a variety of entrepreneurial ventures. They
are afflu people such as successful repreneurs, lawyers, physicians, etc.
who have modete to significant business experience. This type of financing is
called as informal capital because these individuals do not make such investms
in established market places. Such investors are called business angels. They repres
the oldest and the largest segm of the U.S. venture capital industry. On avege,
a typical angel investor invests more than $200,000 a year. Angels frequly put
their mind share in a company’s sttegy and assist repreneurs in taking their
companies forward. Although angel investm is easier to acquire than some of the
more formal types of financing, angels can sometimes be very demanding. Entrepreneurs
should therefore define their relationships with the angels before finalizing the
ts of the agreem. It is impetive to emphasize that any angel investor would
be skeptical to fund a company, wherein the founders do want not invest their personal
savings.

Debt Financing
repreneurs can also
raise capital
from banks through the debt financing route.
Although some angels provide debt capital, commercial banks are the primary providers
of debt capital to small companies. Bankers tend to make business loans through
lines of credit, t loans and mortgages. A line of credit loan is the largest
amount of money that the borrower can obtain from the bank at any one time. An entrepreneur
must with a bank in advance to obtain a line of credit before the company needs
the money because if banks do not know the specifics of their investm, they will
refuse credit. Attempts to obtain line-of-credit loan instantaneously are genelly
ineffective. In addition to the line-of-credit load, banks issue five to ten year
t loans that are genelly used to finance equipm. Since the benefits
of investing in equipm extend beyond a single year, banks are genelly open
to lending money to buy equipm that genete revenues, which match the interest
to be received from such a loan. Finally,
entrepreneurs
can also obtain a mortgage
to provide funding. Mortgages are loans for which certain items of invory or
other properties serve as collatel. Debt financing has its own set of advantages
and disadvantages. Although debt financing increases the potial for higher tes
of return on investm (ROI) and allows repreneurs to retain much of the board
, it also puts repreneurs at grer risk. Irrespective of the startup’s
outcome, banks make sure that they will get their investm back along with interests.
To accomplish this, banks structure their agreems accordingly.

Equity Financing
As opposed to debt financing, equity financing tnsfers the risk from the repreneur
to the investors, but has its own set of dwbacks. Equity financing is when repreneurs
can
raise money
only through selling common or preferred stock to investors. This
implies that an repreneur gives up some of his or her voting rights to investors.
Although most angels offer equity financing, institutional vure capitals make
the biggest equity financing investms. Institutional venture capital firms usually
manage large funds anywhere from $25 million to $1 billion and invest in high
growth companies. When a VC firm invests in a company, the firm genelly takes
a s in the board of directors. VCs assist the repreneurs in taking the companies
forward. The very same VCs do not mind firing everyone, including the founders and
shutting down the company if they detine that it is al. In addition,
ising vure capital is genelly a long shot.
Venture capitalists
will not even
look into a business plan unless the company meets some of firm’s criteria.

Customer financing
At times, large corpotions or potial customers finance the repreneur through
debt or equity routes. Large corpotions provide financial and technical assistance
to
smaller businesses
because as larger corpotions downsize their opetions for
tactical reasons, it becomes important that their suppliers, frequly small firms,
stay healthy. Examples of large corpotions that have historically invested in
smaller firms include giants such as JCPenny, Ford Motors, Motorola, Micron, and
Cisco.

Governm–sponsored progms
Sevel governm progms provide financing to
small businesses
. The fedel governm
has a long history of helping new businesses get started, primarily through the
following fedel progms:

Although there are a number of financing sources, it is important that entrepreneurs
plan
their sttegy to ise capital. The decision to use debt or equity financing
depends to a large ext on the type of business, the firm’s financial strength
and the curr , e.g., whether lenders and investors are optimistic
or pessimistic about the immediate future. The repreneur should start pitching
his or her idea as soon as the business plan is ready to meet the investors’ eyes.
The repreneur should then detine the best suitable capital sources for his
or her business idea and focus on those sources only. repreneurs should allow
ample time for
raising capital
, since it genelly takes more time than most people
think.

Written By
Pdeep Tumati (Principle, go4funding.com)

Source

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