A funding strategy is essentially how to plan on acquiring capital for a company during its crucial early stages in order to build revenue and fund growth opportunities. The most common strategies that a startup uses in funding are from seed funding, venture funding, angel funding, and private equity.
What are the most common funding strategies?
Seed Funding
The beginning of a business venture can be a time of considerable uncertainty. That’s because finding investors that will not only believe in a business idea, but also believe in persons charged with running the business is a daunting task. This is why many people turn to “seed funding,” also known as pre-incorporation funding, during this crucial time period.
Seed Funding is when an investor provides capital (usually in the form of money) to help launch a company before it goes public and trades shares on the stock market or starts its operation with revenue from customers or other sources. Because the company cannot be publicly traded until it goes public, an investor gives money to the company in exchange for some level of ownership in the business.
The term “seed” is used because the investor puts money into a project that will later grow. The company can use this money to pay for its start-up costs, including salaries, equipment and contracts. Before investors receive any revenue from their investment, they are known as “pre-revenue” or “pres.”
Seed funding is usually a major part of startup’s initial funding efforts. Seed funding is usually the least risky form of funding because it is provided by someone or a group of people who are trying to help further the growth of an idea or product that they’ve invested their own time and resources in. It is often a desired strategy because the business owner retains more control over the startups decision making since the investor only expects a small investment return on their investment that will come sometime down the road. Seed funding is often sourced via these three options:
Family & Friends. This should be used as a last resort, not as an initial funding source. Family & Friends may not provide enough capital to get through the first few months of starting a company so they may not be a sustainable initial funding source . Family & Friends can be good for relationships and could potentially help find more potential customers/business partners.
Friends Like Family & Friends, Friends are also good for relationships but will likely not give enough capital to get a business off the ground after getting funded by them . Like Family & Friends, this is one way of getting funding but it is better to use other funding strategies first. Friends should only be used as a last resort because they are harder to manage and sometimes it can become awkward rather than helpful if needed.
Venture Funding. Venture funding is a type of financing provided by Venture Capitalists and mostly used in early-stage start-ups when the company does not have any other source of immediate revenue or cash.
Who Is a Venture Capitalist?
A venture capitalist is a person or organization that provides capital to start-up or existing businesses with the express intent of reaping financial rewards from those companies’ efforts to make profits. Startup companies that do not have an established revenue stream or cash flow are considered to be high-risk by conventional financing sources, and venture capitalists often provide capital to these companies at a high valuation or share of ownership so as to take on this risk.
The venture capitalist invests in the company’s last round of funding in exchange for equity, usually an ownership stake. The company may use part of this money to expand its operations, fund research, pay off debts, or acquire more capital. Venture funding is the most risky form of funding but also one of the best sources for rapidly growing your startup. Venture Funding should be of last resort because once venture investors begin cutting deals, the business owner loses the leverage necessary to make sure that they won’t own more than 50% of that company’s equity.
Angel Funding. Angel funding is crowdfunding in which an individual, known as an angel investor, company or group offers financial support to help launch a startup.
Who is an Angel Investor?
Angel investors are individuals that invest in startups and new businesses by offering needed funds in exchange for that company’s equity. Technically, angel investors should be accredited investors, but this is not always so as other sources of funding like family and friends are now increasingly referred to as angel investors whether or not they meet wealth requirements.
Angel Investors adopt different methods in providing funding for businesses. While some take up shares (equity) in startups, others simply receive a return on their investment after a period depending on the performance of the business. Angel investing provides individuals with an opportunity to invest their savings and help bring new ideas to life without having any direct involvement themselves.
Private Equity. Private equity investing is a type of business that is related to external investing of private companies or public companies who are not profitable. Such funds comprise of wealthy individuals who invest in new markets, industries, and businesses that require large amounts of funding for growth.
The term “private equity” refers to the fact that such investments are usually not publicly known due to regulations by SEC (Securities Exchange Commission) which restricts the amount of information available on these transactions. Private equity firms also limit who can become an investor in order to comply with regulations set by Securities Act 1933.
Many private equity investors don’t have any knowledge about how their investment affects companies, but they do care about making money. Private equity firms are unique because they provide the capital for businesses to expand, and gain expertise through experience. If these investors like what they see in the business, they will then likely invest.
In the beginning stages of a company’s growth you’ll want to focus on raising capital in a way that gives you the most amount of control over your company while also providing you with enough capital for rapid growth. The three most effective ways to do this is by using Seed Funding , Venture Funding , and Angel Investors .
Crowd Funding. Crowd funding is a great way to get seed funding from people who are looking to invest their money into a business. Crowdfunding is done by creating a profile that describes what your company does, posting it on a website, and then asking for monetary investments from many different people. Crowd funding can be a great way to get a company started and is often the best way to begin funding efforts. Best of all, it could potentially provide funding from anyone around the world! If done right, crowdfunding can provide enough capital to build the fundamentals of a business while still maintaining ownership over it.
Regardless of the method chosen to raise money for a business, the process is often a long and complicated one, which requires in-depth understanding on both the part of the company’s management team as well as that of prospective funders. There are many potential pitfalls that can arise from either side if not properly handled – which means that you should never attempt to raise capital without careful consideration beforehand. Raising capital from a private equity investor for example, is a lengthy process that involves many different steps and would often require professional help.
