9 min to read
A startup with a brilliant business idea is aiming to get its operations up and running. From humble beginnings, the company proves the worthiness of its model and products, steadily growing thanks to the generosity of friends, family, and the founders' own financial resources. Over time, its customer base begins to grow, and the business begins to expand its operations and its aims. Before long, the company has risen through the ranks of its competitors to become highly valued, opening the possibilities for future expansion to include new offices, employees, and even an initial public offering (IPO)
If the early stages of the hypothetical business detailed above seem too good to be true, it's because they generally are. While there are a very small number of fortunate companies that grow according to the model described above (and with little or no "outside" help), the large majority of successful startups have engaged in many efforts to raise capital through rounds of external funding.
In fact, only half of the small businesses
in the United States will survive through their fifth year of operation. Furthermore, just 30% of those businesses make it through ten years. Based on this information, it's clear that failure is more frequent than success when it comes to startup companies. So I commend you for wanting to pursue this path. While running a startup may be difficult, it's also extremely rewarding. You'll learn a lot along the way. There are plenty of things. But getting your startup off the ground is the first step. Like with most aspects of business, you'll need some money to do this. If you've never been through this process before, it may seem intimidating. Not sure where to start? - There's no one right answer. 1. Create a detailed business plan
Before you do anything else, you need to have a clear understanding of how you plan to operate your business. A business plan will increase your chances of securing funds. Companies that have a business plan also have higher growth rates. Here's why. First of all, it'll be hard for you to raise money from anyone without a business plan. Different types of investors, which we'll discuss shortly, will need to see financial projections before they even consider giving you a dime. This plan will also set you up for success. It should also include market analysis. This will discuss information and research about your competitors as well as your target market. You'll also want to outline the organizational structure of your company. Have clearly defined roles for managers and other positions within your organization. Arguably the most important part of a business plan is the financials. Do your best to include financial projections for the next three to five years: Make sure your projections are realistic. You don't need to turn a profit on your first day or even your first year. Just try your best to accurately predict your finances. 2. Seek help from friends and family
In the United States, friends and family
are second on the list of top startup funding sources. These are the people who love you and trust you. Most importantly, they believe in you and your potential. Don't be afraid to ask your loved ones for a loan. Plus, unlike with a bank, you'll likely be able to get some money from your friends and family without having to pay any interest. Who knows, if you're lucky, you might even get funds as a gift. So talk to your parents, siblings, grandparents, or even your rich uncle. Just know there are some risks associated with this approach as well. You definitely don't want to take a loan your friends gave you in good faith and lose it. That could put both of you in a very uncomfortable situation. With that said, I've talked to some entrepreneurs who said this had the opposite effect on them. Loans from their family contributed to their success because they had extra motivation to not lose the investment. They didn't want to let their loved ones down. 3. Venture capitalists (VCs)
You can also secure funds from venture capitalists. VC firms invest in the early stages of your company in exchange for an equity share. If you decide to take this route, be prepared to give away a portion of your business. That's not always a bad thing. If VCs have some skin in the game, they may be able to provide you with other resources that can contribute to the success of the company. But just understand that smart VCs will only structure these deals if they are in their favor. They don't want to make a return on their investment in 30 years. VCs want to make their money back, plus some, as soon as possible. The likelihood of you receiving VC funding largely depends on your industry
. Venture capital firms are typically drawn to startups within the software and technology sectors. So if your startup company is a local pizza shop, you probably won't have luck with VCs. 4. Angel investors
Although these terms are often used interchangeably, angel investors differ from VCs. While angel investors can take an equity share of your startup in exchange for their investment, their funding can also be exchanged for convertible debt. It's not uncommon for these investors to be entrepreneurs or former entrepreneurs themselves. Although money is their motivation, they are more likely to be genuinely interested in your business as well as the growth and development of particular industries. If you find the right angel investor, you may benefit from their expert advice and management skills. It's more common for angel investors to supply funding to businesses when they are still in the early stages, whereas VCs typically look to get involved a little bit later. Unlike a VC firm that has a committee and advisors working together, an angel investor may make a decision on their own. They may simply like your plan, trust your goals, and believe that your business will be successful. That's why it's important for you to be able to articulate your business plan well. A short meeting over coffee or lunch with an angel investor might be all it takes to get them on board to fund your startup. 5. Try to minimize initial business costs
Reevaluate your startup costs. You may not need to raise as much money as you initially thought. Make the money you already have last as long as possible. Instead of paying for an office, you could work from your home or shared office space. Pay for goods and services as you go instead of paying upfront for large quantities of products. Use cost-effective materials. Think outside the box. And while this may not work for every startup, you can also barter. Instead of paying for certain products or services, offer your own services in return. This may be successful if you're working with other startup companies in a similar to yours situation. Just do your best to keep costs as low as possible.
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